UK Banks Resilient in the BoE Stress Test: Manageable Losses Supported by Mild Interest Rate and Unemployment Assumptions

DBRS Morningstar has released a commentary discussing the results of the latest stress test on the large UK banks published by the Bank of England (BoE).

• This is the first cyclical scenario carried out by the BoE since 2019. We note that overall the 2022/23 stress test assumptions are broadly similar to the 2019 exercise and the Global Financial Crisis although generally tougher than current macroeconomic conditions.

• The large UK banks demonstrated resilient results with all banks reporting reasonable CET1 ratios despite significant depletion of capital largely due to asset impairments.

• The results of the stress test highlight some of the vulnerabilities of UK banks to an economic downturn. In the severe scenario, the banks report significant accumulated losses on consumer lending while cost of risk appear manageable for mortgages, SME and CRE exposures.

“We view the impact on the UK banks’ CET1 ratio to be manageable in the severe scenario stress tested by the BoE,” said Maria Rivas, Senior Vice President, Global FIG at DBRS Morningstar. “However, we note that the stress test scenarios are largely supported by mild macroeconomic assumptions, particularly for GDP contraction, unemployment and interest rates, which are generally the main drivers of asset quality deterioration and impairments at banks.”