UK banks and those with significant exposures to that market are piling on provisions. Image Credit: Agency

London: British lenders have offered a taste of how much the worst recession in centuries is going to cost. The bill's already at 17.2 billion pounds ($22.4 billion).

Write-offs at the country's six biggest banks so far this year roughly equal Barclays current market value.

"There's likely more of that to come, and with low interest rates dragging on revenues, full-year profits will not be pretty," said Nicholas Hyett, analyst at Hargreaves Lansdown.

The provisions are required under accounting rules, but also reflect concerns about how British households are going to cope with what the Bank of England has said could be the worst downturn in 300 years. For some borrowers, "servicing will become more difficult," said Katie Murray, chief financial officer at NatWest Group Plc, which booked 2.1 billion pounds in charges in the second quarter.

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More to come

Lloyds Banking Group's profit for the period was wiped out by a 2.4 billion pound provision. "Coronavirus has changed many things," CEO Antonio Horta-Osorio said. Lloyds expects to set aside between 4.5 billion pounds and 5.5 billion pounds this year, hinting that the largest provisions have already been taken.

Four months ago, HSBC Holdings put the top estimate on provisions this year at $11 billion. This week, Europe's largest bank said the cost could now reach $13 billion as the global economy deteriorates. The largest single source of the increase was the UK, which accounted for $1.45 billion of the $3.8 billion of the group's second-quarter charge.

Even a breakup?

"Cost cutting is likely in Europe and the US and we would not rule out a breakup option being considered," said Gary Greenwood, analyst at Shore Capital, as he weighed up the options for HSBC in the face of mounting pandemic costs.

While most lenders are warily sizing up the economic turmoil, it has been an especially costly quarter for banks with British operations. The UK is being hit by a pandemic at the same it is negotiating its exit from the European Union, its biggest trading partner.

Barclays took a 1.6 billion pound charge, more than analysts anticipated. "There has been extraordinary economic contraction, especially in the US and UK," CEO Jes Staley said. The bank, whose bleak outlook was counterbalanced by a surge in trading gains, said impairments in the second-half would begin to fall.

These predictions on future provisions depend on how the economy fares as British leaders try to reopen the country while avoiding a feared winter spike in COVID-19 cases. HSBC said that in its worst-case scenario, UK GDP could fall 9.6 per cent this year.

It assigned a 10 per cent probability weighting to its view - the highest chance it has given any country for such a dire performance. If British unemployment reaches 7 per cent, Deutsche Bank AG analysts have estimated UK banks might book as much as 40 billion pounds in provisions over two years.