The second national COVID-19 lockdown in the fourth quarter of last year was less impactful than the first, but still slowed the pace of growth. to return to the pre-pandemic GDP level (see table 2). will be slower than the eurozone and U.S. A recovery is expected to take hold this year, but we think the U.K. The estimated size of the economy in October 2020 was still nearly 8% below its pre-COVID-19 peak, with the services sector affected more than manufacturing. experienced one of the sharpest output contractions of any country in 2020, despite one of the largest support packages among advanced economies. *These scores reflect the group credit profile construct. However, our analysis is forward-looking and we may be in a position to reach a conclusion on certain outlooks in the first few months of the year.
Given the competing pulls of the current national lockdown and the vaccination program, we are unlikely to revisit the negative trend on the BICRA economic risk score in the near term. Conversely, we could lower ratings if downside risks escalate materially, to the detriment of banks' medium-term creditworthiness. We could selectively revise outlooks to stable if we become more confident in the trajectory of the recovery, society's ability to manage COVID-19 while restoring economy activity, and the asset quality implications of tapering fiscal support. We also continue to assess the long-term profitability of banks' business models and their abilities to adapt to structural changes including digitalization and sustainable financing. Although banks' current credit provisions and capital resources provide a prudent basis to negotiate the remainder of this credit cycle, we expect 2021 impairment charges to stay above the historical trend and there remains considerable uncertainty over the scale of ultimate losses. Banking Industry Country Risk Assessment (BICRA) and our negative rating outlooks on most domestically focused banks (see table 1). We reflect the ongoing downside risks in our negative economic risk trend on the U.K. The bank sector also faces continued ultra-low interest rates, which will constrain revenues even as the economy rebuilds. businesses must adapt to less favorable terms of trade with the EU under the agreement struck late last year. Comprehensive fiscal and monetary support have kept banks' problem loans relatively low to date, but borrower defaults, IFRS 9 stage migration, and charge-offs are set to increase this year as stimulus measures phase out. A new COVID-19 variant has accelerated the infection rate and the current national lockdown is likely to remain in place until the vaccination program builds critical mass. We see a number of hazards for banks to navigate on the road to earnings recovery. Although this should support an improvement in profitability, absolute returns on capital will likely remain mediocre.
banks' 2020 credit impairment charges were among the highest in Europe, and S&P Global Ratings expects they will decline this year as the economic recovery gets underway. However, the early implementation of a vaccination program raises hopes that daily life could begin to normalize later in the year. The economy has been hit hard by the COVID-19 pandemic and the government recently reinstated tight lockdown restrictions across the country. We could revise our negative outlooks on the sector and certain banks to stable if we become more confident in the trajectory of the recovery and the scale of banks' ultimate loan losses.Ģ021 is set to be a rebuilding year for U.K.The expected economic recovery means that credit impairment charges are set to fall from last year's elevated level, but remain above the historical average.bank earnings are likely to improve in 2021, but the sector must first negotiate a tricky start to the year, including renewed COVID-19 lockdown restrictions.
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