Profit warnings for financial services sector surge due to COVID-19: EY

The global COVID-19 pandemic has triggered a spike in profit warnings for the financial services sector even though most large firms entered this period in a position of capital strength, having significantly built up reserves since the last crisis.

According to the latest EY analysis, more financial services profit warnings have been issued since the start of 2020 than in the whole of 2019.

UK-listed Financial Services Firms have issued 31 COVID-19 related profit warnings since the start of 2020, compared with 29 profit warnings issued in the whole of 2019, with Q1 2020 experiencing double the year-on-year volume of warnings, recording a higher peak than any quarter during the financial crisis.

The majority of these profit warnings in 2020 have come from the non-bank consumer lending sub-sector, with all but one of the eight warnings citing COVID-19 as the reason for a material downgrade in expected profits. This sub-sector has already issued double the number of profit warnings since January than it did in the whole of 2019.

The asset management and non-life insurance sub-sectors issued the second highest number of warnings (six each) in the first four months of this year, followed closely by the banking sector (five).

Analysts noted that no sector has been immune and even the most diversified portfolios have been impacted.

"Profit warnings from Financial Services Firms are, however, markedly lower than some other more impacted sectors, with 17% of the FTSE listed sector issuing warnings," said EY. "Following the government mandated lockdown and closure of much of the UK high street, the highest volume of Q1 COVID-19 related profit warnings unsurprisingly comes from FTSE Travel & Leisure companies, with 70% of the sector issuing a profit warning. This is followed by the FTSE Industrial Materials sector (with 63% of the listed sector warning), and FTSE Retailers sector (with 61% of the listed sector warning), where the majority of firms have seen activity come to a halt.

"Many of the companies in these sectors are heavily leveraged, and there is likely to be a knock-on impact to the Financial Services Firms that serve them."

Tom Groom, UK head of Financial Services Transaction Advisory Services at EY, commented: “COVID-19 has resulted in health and economic challenges like none we have witnessed before. The impact on households and businesses up and down the country is already profound and may have long term ramifications for some. No sector has been immune, and we are seeing Financial Services Firms issue profit warnings at a rate well above historic precedent, although many are coming from the smaller players."

Groom added: “By and large Financial Services Firms entered this period in a position of capital strength, having significantly built up reserves since the last crisis. This is helping the industry weather the storm and maintain a strong base of financial stability. However, the signs of stress on some of the UK’s largest firms cannot be ignored. Financial Services Firms will continue to monitor the level of warnings coming from the sectors that they lend to, invest in and insure, because what is very clear is that even the most diversified portfolios will be impacted.”