S&P Global Ratings has published a report on the UK banking sector 

LONDON (S&P Global Ratings) Aug. 10, 2021–U.K. banks’ earnings rebounded strongly in the first half of 2021 as the economy started to recover from the effects of the COVID-19 pandemic, S&P Global Ratings said in a report published today (see attached). The main factor was the release of part of the large credit provisions that the sector booked in the same period last year. Banks guided that their credit impairment charges will likely remain very low in the second half, and some may well report a provision release for the full year.

“First-half pre-provision earnings were generally lower year on year, but customer margins showed greater stability in recent quarters, interest-earning assets grew, and strengthening economic activity should benefit fee income,” said S&P Global Ratings credit analyst Richard Barnes. Indicating confidence in their earnings prospects, banks increased dividends and buybacks following the recent withdrawal of regulatory limits on shareholder distributions. “Still, we see banks’ shareholder return targets as stretching in the medium term without a tailwind from interest rate hikes, which may be on the cards,” Mr. Barnes added.

Loan arrears and defaults remain very low but may increase moderately in the second half as the U.K. government phases out temporary fiscal support. Banks maintain sizable management adjustments within their credit provisions to mitigate this scenario and other downside risks to the recovery. Although the pandemic is not yet over, our base-case view is that corporate defaults and unemployment will peak at lower levels than previously appeared likely.

As part of a broader review of European banks ratings in June, we improved the outlooks on most domestically focused U.K. banks on account of the strengthening operating environment (see “Various Rating Actions Taken On U.K. Banks On Recovering Economy,” published on June 24, 2021). Banks’ first-half results confirmed the rationale for our June outlook changes. In particular, we believe that weak structural profitability and residual economic risks are less of a challenge for rated U.K. banks than many of those in continental Europe. Among the larger U.K. groups, most outlooks are now stable, but we have positive outlooks on Barclays and Nationwide due to institution-specific trends.

This report does not constitute a rating action.