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.
Senior Financial Institution Analyst
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Group Head of Ratings
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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
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.
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