IFRS 9 | 1Q26 results update: much ado about nothing?

As an update to our last IFRS 9 results blog on 4Q25, this post provides a 1Q26 update on the loss reserving trends and outlook for UK banks.

1Q26 was another eventful quarter, defined by a dramatic shift in the geopolitical backdrop following the outbreak of the conflict in the Middle East which has unsettled market confidence and increased uncertainty. While events and media coverage were dramatic, the Expected Credit Loss (ECL) response from UK banks was measured — average ECL cover in our sample was broadly steady across the quarter.

Disclosure at the 1Q reporting point is more limited (and is reflected in a shorter blog!) but showed that there was a mix of approaches to incorporating the evolving risks. Some firms were able to update their models with revised scenarios, while others adjusted scenario weightings or addressed the risk through PMAs. Some lenders have implemented additional stagflation scenarios, ensuring that the potential credit impact of an elevated base rate and inflation shock is reflected. Flat coverage considering a worse economic outlook sounds like credit risk alchemy… but the adjustments to the outlook were restrained and some lenders released existing tariff-focussed PMAs, offsetting the impact.

Portfolio performance stayed strong with new-to-arrears flows and the proportion of loans in stage 3 largely unchanged (although there were some idiosyncratic events and some areas, like property development finance, are under pressure).

Lenders continue to closely monitor corporate exposures associated with sectors or products that are directly impacted by the conflict (although these are relatively limited) and counterparty- and sector-level reviews will need to continue to assess the risk as it continues to evolve. But, for now, the main impact seems to be indirect and addressed through the economic outlook.

While the credit impact at 1Q26 has been muted, the full credit effects of the conflict have probably not been felt yet and their ultimate severity will dependent its duration.

1. ECL cover remained steady at 1Q26 as firms begin to consider uncertainty risk

ECL cover in our sample of banks stayed broadly flat at 1Q26. The proportion of loans in Stage 2 increased very slightly due to the modest downgrade in economic outlook. Some existing economic uncertainty and tariff PMAs were released, and portfolio performance remained strong, with the proportion of loans in Stage 3 broadly flat.

2. The economic outlook deteriorated and uncertainty increased

The economic outlook at 1Q26 deteriorated, and the range of expectations increased reflecting the current uncertainty. The average House Price Index (HPI) fall to trough deteriorated from 1.4% to 0.9% (i.e. the average expectation is that prices will grow, but slower) and peak unemployment expectation has increased from 5.1% to 5.4%, with the peak delayed to 4Q26. GDP dropped from 1.1% to 0.7% reflecting IMF expectations that the UK economy could be one of the hardest hit among the G20 major economies.  Peak bank rate was expected to increase in response to elevated inflation, moving from 3.5% in the outlook at 4Q25 to 3.8% in the outlook at 1Q26.

3. Business confidence fell with a shift towards cost management

Intuitively, business confidence has declined sharply since 4Q25, with CFOs now prioritising cost reduction and cash conservation as optimism hit a six-year low. Rising employment costs and business rates are squeezing profit margins, and limited government support leaves firms little room to absorb further price increases.

The GfK consumer confidence index remained close to its long-term average, but the full impact of the conflict may not be being felt by households yet, beyond higher prices at the petrol pump.  2Q26 may offer more meaningful insight into the impact on the UK consumer.

Outlook

It is likely that the full effects of the conflict have not yet been felt by the UK economy. We thought that this was put very nicely by Darren Woods, CEO at Exxon Mobil, who said in their 1Q26 earning call:

“I think it's obvious to most that if you look at the unprecedented disruption in the world's supply of oil and natural gas, the market hasn't seen the full impact of that yet. You only have to look at the ranges that oil prices have moved at, which are very consistent with, you know, the last 10 years in the history there, versus this historically unprecedented disruption. There's more to come if the strait remains closed. Why haven't we seen those impacts manifest themselves fully in the market yet? I think we all know there was a lot of oil in transit on the water, a lot of inventory on the water that has been deployed in the first month of the conflict. Strategic petroleum reserves have been released. Commercial inventories have been drawn down. We've seen that play itself off and mitigate the impact as we move through March and then here through April. You get to the kind of the min working levels of inventory on the commercial side, you're gonna lose one of these sources of supply. We anticipate, as that happens and the strait remains closed, that we will continue to see increased prices in the marketplace.”

1Q26 reporting showed a muted credit risk response and, to some extent, this felt like a re-run of “liberation day”, with limited direct credit impact and indirect impact managed through economic scenarios and some “uncertainty” PMAs. In recent times we’ve also seen significant energy price shocks (Russia/Ukraine) and other hits to affordability (rates/inflation in 2023). Portfolio credit response to these events was astonishingly robust… so perhaps we don’t need to worry too much. Outlook statements stayed pretty benign too.

However, with the duration of the conflict lengthening, and some of the effects that are already baked in likely to emerge more strongly, there may be further downgrades to the outlook reflecting secondary credit impacts and more direct impacts may emerge through particularly exposed counterparties and sectors as conflict-driven real economy impacts transmit into lending portfolios. And we haven’t even started thinking about the impacts of domestic political uncertainty! The environment feels very uncertain (again!) and the next six months is shaping up to be very interesting.

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