UK banks face rising bad debt risks as household savings hit three-year low

Major UK lenders are preparing for a potential increase in unpaid debts as household cash reserves fall to their lowest level in three years. Analysts anticipate that the country’s top banks will set aside a combined four billion pounds for loan losses in 2027. However, this consensus estimate may prove insufficient given the intensifying cost-of-living pressures facing consumers. Lento Tanq, a senior analyst at Bloomberg Intelligence, noted that provisions are likely to rise further as individuals increasingly rely on unsecured borrowing, including credit cards, personal loans, and overdrafts, to manage daily expenses.

The financial strain on households has been exacerbated by rising energy costs following the conflict in the Middle East. Household energy bills are expected to increase by 276 pounds in January, marking the sharpest rise in four years according to consultancy Cornwall Insight. This pressure has significantly reduced financial buffers. Research from Bloomberg Intelligence indicates that 55 per cent of households can now survive for no more than three months after a job loss, a record low. Tanq described this as a shortened path from unemployment to falling behind on bills, suggesting that the acceleration of financial deterioration has occurred despite fewer people declaring outright financial difficulty.

Banks make quarterly provisions for bad loans, representing funds set aside on their balance sheets to absorb expected future losses when borrowers fail to repay. Tanq warned that thinner household buffers could lift unsecured credit losses at major institutions. He observed that households are already using credit and savings to absorb living-cost pressure, which raises an immediate warning for unsecured lenders. Barclays is expected to face the most exposure due to its significant position in the credit market and personal loan books. The bank expanded its UK credit card exposure to 17.5 billion pounds in the first half of the year, up from 17.2 billion pounds at the end of 2025. Its UK personal loans also grew to 8.9 billion pounds from 8.5 billion pounds. Barclays declined to comment on the figures.

UK lenders have already begun to increase loan provisions in response to the Middle East conflict. Barclays set aside 823 million pounds for potential loan losses in the first quarter of the year following the outbreak of the US-Iran war. HSBC has also increased its forecast for loan losses in 2026 to 45 basis points, citing ongoing uncertainty in the outlook. This equates to bracing for 4.50 dollars of every 1,000 dollars lent to go unpaid. Despite the strain in unsecured borrowing, Tanq noted that mortgage loss severity should remain lower, as house-price growth is positive and borrower equity is intact. This outlook is considered favourable for Lloyds, which holds the largest overall mortgage book in the UK, and Santander UK, whose loan book is skewed towards residential mortgages following its acquisition of TSB.