LONDON (Reuters) – British banks took a darker view than almost all of their European counterparts in their second quarter results as fears of the coronavirus, Brexit and low interest rates led them to incorporate more scenarios. difficult “worst-case” scenarios in their risk models.

Investors had expected a scorching run of half-year results, but Barclays BARC.L, Standard Chartered STAN.L, Lloyd LLOY.L, NatWest Group NWG.L and HSBC HSBA.L did not meet these low expectations.

Provisions for potential loan losses at the five banks topped $ 22 billion, beating analysts’ forecasts and increasing selling pressure on stocks already hammered by the pandemic this year.

On the other hand, the French BNP Paribas BNPP.PA and Credit Suisse CSGN.S exceeded analysts’ forecasts, benefiting from exceptional trading volumes as well as relatively modest provisions.

HSBC and Lloyds were punished for poor performance, with shares of both banks hitting their lowest levels in 11 and 8 years respectively.

The five UK banks have underperformed, falling from 42% to 55% this year against a 36% drop in the European banking index .SX7P.

“UK banks are facing a bigger economic downturn than most Europeans as the UK has faced a bigger shock from the COVID-19 pandemic, and this has spilled over into provision levels “said Patrick Hunt, partner at Oliver Wyman consulting firm.

The UK economy is expected to shrink by 11.5% this year, while the eurozone contracts by 9.1%, according to OECD forecasts in June.

Other factors weighing on UK banks include relatively higher exposure to unsecured consumer loans, a larger cut in central bank rates and the potential for a “no deal” exit from the Brexit to the end of 2020, analysts said.

The deployment of new lockdowns in the north of England in response to an increase in infections also threatens to derail the country’s nascent economic recovery and further damage bank balance sheets.

DIFFICULT CHOICES

NatWest and Lloyds have said loan loss provisions are expected to be lower in the second half of the year, giving hope that the country’s banks may have “cooked” provisioning and outstripped their European rivals.

But they also warned that the outlook could deteriorate further and significantly lowered their worst forecast for the economy, predicting a GDP decline of as much as 17% in 2020.

The larger provisioning of British banks compared to their European rivals was largely due to the former having incorporated darker worst-case forecasts into their economic models.

Lloyds, for example, said UK GDP could fall 17.2% in a worst-case scenario, compared to a 7.8% drop previously modeled as the extreme downside case when the bank released its results in April.

While European competitors have not disclosed their models in such detail, Deutsche Bank DBKGn.DE allowed a more modest 2 percentage point decrease in German GDP compared to the baseline scenario of its adverse scenario.

This disparity is reflected in the returns that banks pay on their debt.

Deutsche Bank bonds maturing in August 2023 DE187315832 = were trading at a yield of 0.03% on Tuesday, 38 basis points lower than a comparable Barclays rating from September 2023 GB187398274 =. In January, Barclays’ yield traded below that of its German counterpart.

“Asset quality in the UK appears to be deteriorating faster than in Europe and this is reflected in bonds,” said Filippo Alloatti, credit analyst and portfolio manager at Federated Hermes.

NatWest CFO Katie Murray said the bank’s worst-case scenario included both additional lockdowns to control the spread of the virus and a disruptive Brexit.

HSBC said its operations in Britain, where it charged $ 1.5 billion against expected credit losses, had been particularly hard hit and that it would seek to accelerate cost-cutting plans, including layoffs.

Tom Merry, chief financial officer at Accenture, said banks are prioritizing reducing costs and preparing for restructuring and debt collection transactions – including improving credit risk modeling to raise the red flags – in anticipation of a difficult second half.

The cost reduction is expected to include further branch and office closures, Merry said, with any capital spending going into digital services.

“If there is a good thing for banks to take away, it is that if they are able to accelerate the digital transformation, they will be stronger on the other side. “

($ 1 = 0.7651 pounds)