By Iain Withers and Lawrence White
LONDON (Reuters) - Britain's banks took a gloomier view than almost all their European peers in their second quarter earnings, as coronavirus fears, Brexit and low interest rates caused them to bake tougher "worst-case" scenarios into their risk models.
Investors had expected a torrid set of half-year results, but Barclays, Standard Chartered, Lloyds, NatWest Group and HSBC fell short of these low expectations.
Provisions for potential loan losses across the five banks topped $22 billion, blowing past analyst forecasts and increasing selling pressure on shares already hammered by the pandemic this year.
By contrast, France's BNP Paribas and Credit Suisse beat analyst forecasts, benefiting from bumper trading volumes as well as relatively modest provisions.
HSBC and Lloyds were punished for poor results, with shares in both banks plumbing their lowest levels in 11 and 8 years respectively.
All five UK banks have under-performed, falling by between 42% and 55% this year compared to a 36% fall in the European banking index.
"The UK banks are facing a more significant economic drop than most Europeans as the UK has faced a bigger shock from the COVID-19 pandemic, and that has fed through into provision levels," said Patrick Hunt, partner at consultancy Oliver Wyman.
The British economy is forecast to shrink 11.5% this year, while the euro area contracts 9.1%, according to OECD forecasts in June.
Other factors weighing on UK banks include a relatively higher exposure to unsecured consumer lending, a larger drop in central bank rates and the potential for a "no deal" exit from Brexit transition arrangements at the end of 2020, analysts said.
The roll out of further lockdowns across the north of England in response to a rise in infections also threatens to derail the country's nascent economic recovery and damage bank balance sheets further.
TOUGH CHOICES
NatWest and Lloyds gave guidance that loan-loss provisions should be lower in the second half of the year, raising hopes the country's banks may have "kitchen sinked" provisioning and got ahead of European rivals.
But they also warned the outlook could deteriorate further and drastically downgraded their worst case forecasts for the economy, predicting GDP drops of as much as 17% in 2020.
The heftier provisioning among British banks relative to their European rivals was largely because the former incorporated gloomier worst-case forecasts into their economic models.
Lloyds, for example, said Britain's GDP could tumble 17.2% in a worst scenario compared with a 7.8% fall previously modelled as the extreme downside case when the bank reported results in April.