(Alliance News) - S&P Global Ratings has downgraded the outlook for six UK lenders, as the ratings agency expects bank earnings, asset quality, and in some cases, capitalisation, to weaken "meaningfully" through 2020 and into 2021.
Barclays, Lloyds, RBS, Virgin Money UK and Santander UK have had their outlooks cut to Negative from Stable, while Nationwide's outlook was shifted down to Stable from Positive.
All six lenders had their ratings affirmed, however.
Despite governments' measures to contain the Covid-19 pandemic, European economies, including the UK, face an "unprecedented challenge" ahead, S&P said.
The ratings agency continued: "We continue to expect the UK's wide-ranging fiscal and related monetary measures to substantially mitigate this extraordinarily sharp, cyclical shock to the economy, and so also support the banking system in its key role as a conduit of fiscal and monetary support."
S&P said the negative rating movements reflect the "substantial" risk facing domestic lender.
"Until the start of March, UK banks were fully engaged with the same two key themes that have been paramount in recent years - harmonising balance sheet strength with solid investor returns, and identifying how to refine business and operating models in the face of the looming risks and opportunities of the digital era," S&P said.
This has been significantly altered due to the Covid-19 pandemic, however.
In addition to the human cost, S&P noted, large parts of economic activity in the UK and much of the rest of Europe have "ground to a halt".
S&P continued: "With isolation strategies still very much in force, our economists expect sharp economic contraction in the second quarter of 2020, followed by a rebound starting in the third quarter."
However, S&P is now more cautious on the strength of recovery through 2020 and into 2021, envisaging a 2.4% decline in global GDP in 2020, with a 6.5% drop in the UK, before rebounding by 6% in 2021.
Even under this base case, the effects of Covid-19 will be evident for long after the crisis subsides, S&P said.
UK authorities, like others in the rest of Europe and elsewhere, have delivered unprecedented policy responses in the form of monetary, fiscal, and regulatory support to their economies.
"The capitalised, better-funded, more-liquid banks that have gradually emerged in the UK since the global financial crisis have played an instrumental role as a conduit of the expansion of low cost credit to affected households and businesses," S&P added.
While S&P expects the UK banking sector to remain "resilient" in the face of this "short-term cyclical shock" - hence the rating affirmations - the pandemic will still have a "meaningful" impact on on asset quality, revenues, profitability, liquidity and, potentially, capitalisation.
S&P continued: "We expect few of these negative trends to be strongly evident in UK banks' first-quarter results, but consider that they would become increasingly evident through the course of 2020 and persist into 2021. Bank asset quality will be key to this outcome."
The investors service is also aware its best case is open to "significant" downside risks.
"Even under our economic base case, the policy responses taken in the UK may be less than totally successful in avoiding permanent economic damage later. We note also that a significant component of the fiscal support package comprises additional indebtedness - for the sovereign, some households, and many businesses. At best, the easing of physical isolation will likely not start for some weeks, is likely to be slow, and could be subject to setbacks. The longer the delay in the recovery of economic activity, the less sustainable this extra debt will be," S&P said.
The credit rater expects systemwide domestic loan losses to be a key indicator that it assigns to economic risk within the UK banking industry.
"Specifically, we estimate that the domestic loan loss rate could rise to 100 basis points in 2020, which would be around five times the level we have observed in each of the past six years," S&P said, adding: "In 2021, on the back of the economic recovery, we assume that the systemwide loss rate would fall to around 67 basis points, which we judge to be closer to, but still slightly above, the long-run UK average."
By Paul McGowan; paulmcgowan@alliancenews.com
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