Announcements Research

GCR maintains the United Kingdom of Great Britain & Northern Ireland Financial Institutions’ Sector Risk Score of ‘11.0’

Summary

Johannesburg, 7 December 2021 – GCR Ratings (“GCR”) has maintained the United Kingdom of Great Britain and Northern Ireland Financial Institutions’ sector risk score of ‘11.0’.

The Financial Institutions Sector Risk Scores are available for download at gcrratings.com/risk-scores/.

The GCR Financial Institutions Sector Risk Assessment

The Financial Institutions sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score. The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology. GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor an insurer to its current operating conditions. For more details on any of the above, please read the related criteria and research listed below.

GCR periodically publishes updated “Financial Institutions Sector Risk Scores”, which supersede previous publications. The publication titled “GCR Financial Institutions Sector Risk Scores, 7 December 2021”, available at https://gcrratings.com/risk-scores/, supersedes the article published on 14 September 2021.

United Kingdom of Great Britain & Northern Ireland Financial Institutions Sector Risk score: ‘11.0’. Country Risk Score 14.5, No Mapping Table

The United Kingdom of Great Britain and Northern Ireland (“UK”) financial sector risk score reflects the strong operating environment, underpinned by high levels of wealth, good economic diversity, a strong regulatory framework supporting financial sector stability, low through-the-cycle credit losses, generally strong risk management, and diverse funding structures with deep, liquid capital markets.

Banking sector asset quality has improved since the peak of the pandemic in mid-2020. Most UK Banks raised significant COVID-19 related credit overlays in 2020, causing credit losses to exceed historical levels, and along with low interest rates and subdued client activity, depressed earnings. In 2021, asset quality held up better than expected thanks mostly to the rollout of various government support packages meant to assist the hardest hit economic sectors. The macro-economic outlook for UK is much more positive than a year ago with stronger GDP growth expected in 2021 and 2022, and most banks were able to release excess provisions towards the latter half of 2021, resulting in much improved 3Q 2021 performance.

Nevertheless, the sector still faces a great deal of uncertainty over the next 12-18 months which could undermine a sustained recovery. This mainly stems from 1) curtailed government support that could exacerbate asset quality pressure in strained sectors, while also noting SME’s that may have benefited from some form of financial support are generally more geared now, compared to pre-pandemic levels, 2) possible post ‘Brexit’ economic fallout and 3) more persistent inflationary pressure and supply chain disruptions that could lead to higher interest rates. As such, credit losses and NPLs may revert to historic levels within the next 2 years, following credit impairment releases observed across most industry participants in 2021 so far, but could remain strong in the short-term should the UK sustain is economic recovery.

Positively, the UK banking sector reflects a strong balance sheet, with solid liquidity and sound capitalisation, providing a buffer against low industry profitability (mostly due to very low interest rates). These strengths are likely to be sustained as loan growth is expected to average 2%-3% in 2022 and risk adjusted capital metrics benefit from lower risk weighted asset growth.

Analytical contacts

Analyst Vinay Nagar Senior Financial Institution Analyst
Johannesburg, ZA Vinay@GCRratings.com +27 11 784 1771
Analyst Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Institutions, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, October 2021


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2022 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.