UK banks stem domestic loan losses

UK banks' losses from domestic loans plummeted last year to "exceptionally low" levels, in a trend that is expected to continue as the economic recovery gathers pace, according to Standard & Poor's.

The credit rating agency said losses from banks' UK loan books dropped to £3.3bn in 2014 - or 0.14 per cent of total loans - down from more than £17bn the previous year.

S&P said this was "a recent historic low" and "a far better result" than its earlier estimated loss of £15bn forecast in June last year.

The drop also marks a vast improvement from 2013, when losses amounted to 0.69 per cent of lending.

However, Royal Bank of Scotland in particular exacerbated the industry's UK loan losses in 2013, after it reported an impairment charge of £3.6bn, partly because of its creation of a "bad bank".

In contrast, the lender reported a UK loan impairment release of £101m last year, which was alleviated by improved property market conditions.

One of the key reasons why banks' loan losses significantly declined last year was the better than expected domestic economic growth, S&P said.

The UK's economy expanded by 2.6 per cent last year, marking the fastest rate since 2007 and up from 1.7 per cent in 2013.

Some banks had also booked "hefty provisions" in prior years and were able to work out problem assets more quickly than expected.

Losses stemming from residential mortgages amounted to 0.04 per cent of total lending last year, undershooting expectations of 0.07 per cent, while consumer credit losses reached 2.05 per cent, below S&P's forecast of 3.25 per cent.

As a result of the economic improvement, S&P has cut its forecast for domestic loan losses. The rating agency expects loan losses to reach £6.9bn this year and total £18.6bn over the three-year period from 2014 to 2016.

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The amount of non-performing loans, where the borrower is not paying interest or any of the capital, also declined last year.

S&P said the two banks with the largest stock of NPLs - RBS and Lloyds Banking Group - reported a sharp fall last year.

RBS's ratio of NPLs to total loans fell to 6.8 per cent in December, from a peak of 9.5 per cent in June 2013, while Lloyds said this figure fell to 2.9 per cent at the end of last year, down from 10.3 per cent at the end of 2010.

S&P said the 25-year median ratio for the four largest banks - including the last two major economic downturns - is about 2.8 per cent.

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