UK’s economic growth spurt helps big banks

Tim Wallace
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BANKS’ losses on bad loans dived last year as the economic recovery took hold, and analysts at credit ratings agency Standard and Poor’s expect the trend to give the sector a further boost in the years ahead.

Loan losses plunged dramatically in 2014, collapsing from £17.1bn in 2013 to £3.3bn last year.

And the analysts, headed by Nigel Greenwood, expect loan losses to stay low, at £6.9bn in 2015 and £8.5bn in 2016.

As a percentage of their loan books, this represents a fall from losses of 0.69 per cent in 2013 to just 0.14 per cent in 2014, before edging back up to 0.28 per cent for 2015 and 0.34 per cent in 2016.

The biggest improvement from 2013 to 2014 was a dramatic turnaround in the performance of corporate loan books, where losses fell from £13bn to £0.4bn.

Consumer credit losses dipped from £3.3bn to £2.5bn, and residential mort­gage losses fell from £0.8bn to £0.5bn.

One factor driving the huge swing is that RBS declared large losses in 2013, followed by a modest loan impairment release in 2014. But the overall trend is clear, the analysts believe.

“Banks’ balance sheets usually mirror the developments in the real economy,” said the research note.

“In the current economic cycle, loan losses peaked in 2009, when UK GDP fell by over four per cent. In the period 2010-2013, UK loan losses decreased but only gradually because the nation’s economy emerged in a stuttering fashion from its deep recession.

“However, 2014 proved to be a remarkable year as loan losses plummeted, helped by the acceleration in UK economic growth to 2.8 per cent in 2014 from 1.7 per cent in 2013.”

Over the course of 2016, corporate loan losses of £4bn will only slightly exceed the £3.5bn in consumer credit, while residential mortgages will still make up the smallest proportion of the losses at £1bn for that year.

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