We have updated our Lifetime Expected Credit Loss (LECL) estimates for the benchmark secured and unsecured portfolios, using August month-end data.

Model Inputs

After worsening credit conditions in our basket of UK companies in June and July, the August index value is at its lowest value since February. Compared with the July Credit Cycle Index (CCI) forecast (where two consecutive increases drove momentum in the forecast), the August forecast therefore now shows a more-direct path back towards normal credit conditions. Whilst the underlying market price data should incorporate all information, public and private, experimental data from the Office for National Statistics (ONS) can only have served to increase the amount of information available to market participants (and hence certainty around asset returns, under the Merton default model).

With two months of positive house price index (HPI) growth, the vector autoregression framework detects the momentum. Compared with the July HPI forecast, the August forecast therefore predicts more favourable collateral values, albeit with the rate of growth reverting to its long-run historical average. In the experimental ONS data, Energy Performance Certificate (EPC) lodgements are a reasonable forward-looking view of broad housing market activity, and are higher than a year ago.

Considering the "time to z=-1" metric discussed in our previous article, this now stands at 12 months.

Model Outputs

The table below summarises LECL uplifts with respect to year-end 2019, for the benchmark secured portfolio. Compared with our original article in this series, secured LECL estimates have fallen by as much as 60% across all maturities and scenarios. Unsecured LECL estimates have fallen by 30%-50% with respect to March. Further, the August base case has a closer alignment to the March upside estimate than the March base case. As discussed at the time, the regression model does not cope particularly well with tail events and has historically predicted a slower return to normal conditions than has been experienced in practice. Once again, this seems to be happening.

Results Table (Secured)

The table below summarises LECL uplifts with respect to the 31 December 2019 base case, for secured lending:

Maturity (months)
base
down
up
6
1.8x
2.6x
1.2x
12
1.7x
3.0x
1.0x
24
1.7x
3.6x
0.8x
36
1.6x
4.1x
0.7x
48
1.6x
4.8x
0.6x
60
1.5x
5.4x
0.6x
72
1.5x
6.2x
0.5x
84
1.5x
7.1x
0.5x
96
1.4x
8.1x
0.5x
108
1.4x
9.3x
0.4x
120
1.4x
10.6x
0.4x


Results Table (Unsecured)

The table below summarises LECL uplifts with respect to the 31 December 2019 base case, for unsecured lending:

Maturity (months)
base
down
up
6
1.8x
2.6x
1.3x
12
1.8x
2.7x
1.1x
24
1.6x
2.8x
0.9x
36
1.5x
2.8x
0.8x
48
1.5x
2.8x
0.7x
60
1.4x
2.7x
0.7x
72
1.4x
2.6x
0.7x
84
1.3x
2.6x
0.6x
96
1.3x
2.5x
0.6x
108
1.3x
2.5x
0.6x
120
1.3x
2.5x
0.6x