IFRS 9 | 3Q25 results update: everything is still flat… but will 2026 see a slow turn in the credit cycle?

As an update to our last IFRS 9 results blog on the 2Q25 results, this post gives a 3Q25 update on the latest loss reserving trends and outlook for UK banks. With fewer data points disclosed at 3Q25 we’ve kept this edition short(er).

ECL cover and the proportion of loans in stage 3 stayed flat at 3Q25 having been at similar levels since 4Q24.  Banks continued to report good asset performance and a benign outlook for year-end ECL (albeit there’s not much time left now!). All of this is underpinned by an economic outlook that has also been broadly stable since 4Q24.

All this stability feels slightly at odds with the wider level of uncertainty and slightly depressed confidence measures. However, the volatility around changes to trading arrangements has abated somewhat.

We have heard a change in the tone of our conversations with credit teams over the last quarter: while they haven’t seen a change in credit behaviour yet, their nervousness is building. With some emerging weaknesses in the labour market and impacts on business operating costs over the last year, they are questioning whether a slow turn in the credit environment could be starting.  On the other hand, credit folk could be accused of having a pessimistic outlook as a professional characteristic.

Two interesting topics of conversation this quarter have both been mortgage-related: the increase in high LTV products over recent months and the impact of the Renters’ Reform Bill on buy-to-let lenders and potential consequences for loan loss reserving.

ECL cover was broadly flat at 3Q25 with credit performance showing continued resilience

ECL cover has stayed broadly flat since 4Q24. The recent stability and the c. 15% drop in coverage since 4Q19 are striking.  The proportion of loans in stage 3 has stayed broadly flat since December 2019.

The Q3 base case outlook remained stable

The economic outlook has been the most important driver of changes in ECL for the last few years.  The stability of ECL coverage this year is reflected in the broad stability of the economic outlook feeding into the models.  There were some small changes in outlook compared to 2Q25: a slight deterioration in HPI, a slight increase in peak unemployment, and a slight improvement in GDP alongside some minor shifts in scenario weightings from upside to base/downside.

Despite this overarching stability in the base case, recent data points to a subtly worsening economic environment. ONS data reveals a deteriorating UK labour market in 3Q25, with unemployment reaching 5% and redundancies at 4.5%, both post-Covid highs. Rising payroll costs and consistently falling vacancies (now below pre-pandemic levels) signal cooling labour demand, with nominal wage growth also slowing.

Credit risk officers are cautious, despite things appearing calm. This concern stems from five consecutive quarters of deteriorating business sentiment (ICAEW Business Confidence Monitor and Deloitte CFO Survey), low consumer confidence, a slowing labour market, and high payroll expenses. These combined factors are straining household budgets and corporate earnings, which could lead to a potential squeeze on debt service capacity.

Business confidence dipped in 3Q25 while consumer confidence remained broadly flat

Business confidence declined in 3Q25, falling below its long-run average while GfK consumer confidence remained weak but largely unchanged. Although economic uncertainty improved in 3Q25, businesses and individuals remained cautious. This is supported by the Deloitte CFO Survey, which identified geopolitics and the UK's issues with productivity and competitiveness as the main risks for businesses. Similarly, the Deloitte Consumer Tracker highlights that consumers remain cautious about spending due to pressures on personal finances and rising household costs.

The prevailing unease suggests that the financial stress already affecting vulnerable households and businesses could persist and lead to a heightened risk of delinquencies.

Mortgage hot topics

The share of gross mortgage advances with LTV ratios exceeding 90% rose to 7.1% in the latest quarter, marking the highest level since 2Q08. This increase, alongside 2-year mortgage rates for 90% and 95% LTVs hitting their lowest since 2022, signals a shift in risk appetite. At the same time, the share of lending to applicants with loan to income ratios (LTIs) above 3x has remained elevated. This trend has prompted the Financial Policy Committee to recommend measures aiming to limit the aggregate flow of new residential mortgages with LTIs at or greater than 4.5.

Meanwhile, the Renters’ Reform Bill has become a key focus for buy-to-let (B2L) lenders, with its potential to reshape credit risk profiles. The reforms, aimed at strengthening tenant protections and raising housing standards, could impose operational and financial burdens on landlords, especially smaller ones, and potentially drive higher B2L credit losses. Lenders are starting to consider the implications for loan loss reserving, including potential PMAs for repossession delays or increased loss expectations. These developments, while not yet fully realised, add a layer of uncertainty to what has otherwise been a relatively stable ECL outlook in recent quarters.

Outlook

In terms of the outlook, portfolio fundamentals have stayed strong, and the benign ECL forecasts reported by the banks in our sample are underpinned by their view that the base case economic outlook is also benign and aggregate corporate and household indebtedness remains low.

However, uncertainty persists in several key areas:

While the anticipated ECL impact of tariffs has not materialised to date, the Nov’25 MPC points that it is too early to judge whether this reflects diminished or merely delayed effects of trade policy changes. Banks and businesses continue to closely monitor how these factors may affect operations and risk strategies.

In the labour market, signs of softening have led credit officers to express increasing concern about the potential impact on ECL. However, the Nov’25 MPC predicts that unemployment will peak at 5%. Similarly, rising personal insolvency rates are evident, raising questions about the extent to which these will flow into ECL as year-end figures come to light.

In the mortgage market, the recently enacted Renters’ Reform Act could impact LGD and recovery timelines, particularly for B2L lenders. Potential introduction of PMAs is being considered by some lenders, though the full effects of the legislation remain unclear.

Furthermore, early signs of stress are emerging within the SME segment. Sectors such as accommodation and food, construction, and retail trade are seeing an uptick in insolvencies and arrears, as these firms increasingly feel the pinch of accumulating input and labour costs.

While the 3Q25 numbers might appear steady, there is a growing undercurrent of unease among credit teams, and the coming quarters will be key to observing if these underlying jitters begin to manifest in the data.

You can find previous publications in this series below. Alternatively, please don’t hesitate to contact us, we’d be happy to discuss any of the topics covered here with you.

IFRS 9 | 2Q25 results update: calm on the surface but are there dangers lurking beneath?

IFRS 9 | 1Q25 results update: Uncertainty takes centre stage | Deloitte UK

IFRS 9 | 4Q24 results update: the return of uncertainty? | Deloitte UK