Fear over how the coronavirus will affect outstanding loans to companies struggling with the coronavirus pandemic could cost UK banks billions of pounds, claims a new report.
Insurers, hedge funds and small investors in corporate bond funds are also at risk.
Co-founder of the specialist finance consultancy Fideres, Alberto Thomas said: “It is going to be two to three times worse than in the global financial crisis.”
His firm thinks the British banking system could lose as much as £15 billion, just part of a possible $200 billion loss worldwide.
Much of the international debt is in risky leveraged loans and experts have warned the scale of speculative-grade or ‘junk’ lending has ‘exploded’ in the last decade.
UK losses are likely to come from huge loans extended to airlines and other major companies.
There is also concern about ‘extended positions’ with loans to essential services.
American bank Citigroup said the industry’s pledge to allow retail borrowers to take payment holidays would prevent bad debts in that area, but a drop in requests for new loans would hit revenue.
However, the real problems lie with clients in the aviation and hospitality sectors who have been warning government about the threat to their businesses.
The banks also have commercial exposures to energy and water supply companies:
- Barclays is said to have a £45.2 billion exposure to energy and water and £27.3 billion to a mixture of wholesale, retail distribution and leisure.
- Lloyds is said to have a £3.7 billion exposure to energy and water supply with a further £19.3 billion to transport, distribution and hotels.
- Royal Bank Of Scotland (RBS) is outstanding £14.3 billion in natural resources, £20.6 billion in retail and leisure and £18.8 billion in transport.
Dividend payments scrapped
Many of Britain’s top banks have bowed to public pressure and scrapped dividend payments to shareholders.
The move allows them to hold on to the cash which might be needed in other areas as the pandemic continues.
Five of the country’s biggest banks – Lloyds Banking Group (LBG), Barclays, HSBC, Santander and Standard Chartered – were expected to pay around £15.6 billion to shareholders, according to analysts from investment firm AJ Bell.
A statement from the Prudential Regulation Authority (PRA) said: “Although the decisions taken today will result in shareholders not receiving dividends, they are a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption.”
No dividends are expected to be paid until the end of the year and the PRA said the move ‘should help the banks support the economy through 2020’.
Stephen Jones, chief executive of UK Finance, said: “It’s very prudent for banks to be retaining capital rather than distributing it in the current environment.
“It’s important that the banks are given as much firepower as they can to support the economy.”
The Bank Of England said it did not expect there to be any problem that could not be dealt with as the regular stress testing the industry goes through had ensured they held £1 trillion of liquid assets which would enable the to withstand ‘severe market disruption’.