By Simon Clark 

The coronavirus pandemic pummeled British banks in the second quarter as many companies struggled to reopen and individuals reduced spending and deferred payments on loans. The industry is also grappling with Brexit and the increasing likelihood of negative interest rates.

Lloyds Banking Group PLC shares fell as much as 9% Thursday after the London-based lender said it swung to a GBP461 million ($598 million) loss in the second quarter because of the impact of the pandemic. Lloyds, Barclays PLC and the U.K. unit of Banco Santander SA increased loan-loss charges in the three months ended June, compared with a year ago.

The U.K. has been hit hard by the coronavirus, with the highest number of reported deaths in Europe. It was slower to unlock and its economy has had less time to regain its footing than places such as France and Germany.

The challenging economic conditions add to uncertainty facing British banks as politicians try to reach a trade agreement with the European Union. The European Banking Authority this week reminded lenders that the transition period for Britain's EU exit expires at the end of the year. The U.K. and EU have yet to strike an agreement on their future trade relationship.

Coutts, a unit of state-controlled NatWest Group PLC which provides banking services to wealthy people including Queen Elizabeth II, told clients on July 27 that it would stop lending to EU residents because of the lack of a trade agreement.

Another complication facing U.K. banks: The Bank of England has shifted its tone in recent months toward possibly using negative interest rates, which can squeeze bank profitability. In anticipation of such a move, a swath of U.K. government bond yields are already in negative territory, while the benchmark 10-year gilt yields just 0.08%.

"There is a highly uncertain environment out there," Lloyds Chief Executive António Horta-Osório told journalists.

Lloyds was the worst performer on the Stoxx Europe 600 Banks index in early trading on Thursday.

Unlike rivals such as Barclays and HSBC, which have large overseas operations, Lloyds's business is concentrated in the U.K and is most vulnerable to conditions there. The bank set aside GBP2.39 billion for bad loans in the second quarter, more than seven times the same period last year, adding to GBP1.43 billion set aside in the first quarter. Lloyds expects to set aside as much as GBP5.5 billion this year.

Santander on Wednesday reported a massive EUR12.6 billion ($14.8 billion) charge for lowering valuations of some previous acquisitions in the wake of the pandemic. About half of the charge came from its U.K. business, which is exposed to mortgage lending, where margins are being squeezed.

Barclays said Wednesday that its U.K. unit lost GBP123 million in the second quarter, down from a profit of GBP328 million in the same quarter last year. A better performance from Barclays's corporate and investment bank enabled the lender to report a small overall profit for the quarter.

Barclays Chief Executive Jes Staley said his strategy of maintaining a diversified business with international exposure was working. He has been under pressure from activist investor Edward Bramson, whose firm Sherborne Investors has said it wants Barclays to shrink its investment bank and become a more narrowly focused consumer bank.

"The reason that we have been able to support the economy as extensively as we have and remain financially resilient is because of our diversified universal banking model," Mr. Staley said Wednesday.

Standard Chartered PLC, which is based in London but does most of its business in the faster growing economies of Asia, said Thursday it made a $549 million net profit in the second quarter.

Write to Simon Clark at simon.clark@wsj.com

 

(END) Dow Jones Newswires

July 30, 2020 08:40 ET (12:40 GMT)

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