Business 4 min read By Callum Montgomery
UK banks brace for bad loan surge as household savings hit three-year low
Lenders are expected to set aside £4bn for loan losses in 2027, but analysts warn provisions may fall short as households burn through savings and turn to unsecured credit to cover rising living costs.
UK banks are preparing for a rise in unpaid debts after household cash reserves fell to their lowest level in three years, with analysts warning that lenders may need to set aside more than the £4bn currently pencilled in for loan losses in 2027.
According to analyst consensus, the country's top lenders are expected to provision a combined £4bn for bad loans that year. But Lento Tanq, senior analyst at Bloomberg Intelligence, said that figure risks coming up short as consumers lean on credit cards, personal loans and overdrafts to cover everyday costs.
Tanq said provisions would likely climb higher as households turn to unsecured borrowing to absorb living-cost pressure. He pointed to a «shortened path» between losing a job and falling behind on bills, describing it as evidence of «mounting financial pressure» on household finances.
«The acceleration of change suggests households' financial position has been squeezed further over the past year, despite fewer declaring outright financial difficulty,» he said.
The warning comes as energy bills are set to rise sharply. Household energy costs are expected to increase at the fastest rate in four years in January, with a £276 jump, according to figures from consultancy Cornwall Insight. The rise follows the conflict in the Middle East, which sent energy prices soaring and has weighed on household budgets.
Bloomberg Intelligence research found that 55 per cent of households could now survive no more than three months after a job loss — a three-year record. Tanq said thinner household buffers could lift unsecured credit losses at the country's biggest banks.
Banks make provisions for bad loans each quarter, reflecting money set aside on their balance sheets to absorb expected future losses when borrowers fail to repay. Lenders have already moved to increase provisions following the conflict in the Middle East. Barclays set aside £823m for potential loan losses in the first quarter of the year after the US-Iran war broke out, while HSBC raised its forecast for loan losses in 2026 to 45 basis points, equivalent to $4.50 of every $1,000 lent going unpaid, citing «ongoing uncertainty in the outlook».
Barclays is tipped to face the deepest exposure, given its dominance in the UK credit market and personal-loan books. The bank expanded its UK credit card exposure to £17.5bn in the first half of the year, up from £17.2bn at the end of 2025, while personal loans in the UK grew to £8.9bn from £8.5bn. Barclays declined to comment.
«Households are already using credit and savings to absorb living-cost pressure, raising a more immediate warning for unsecured lenders,» Tanq said.
The picture is less severe in the mortgage market. Tanq said mortgage «loss severity should remain lower, while house-price growth is positive and borrower equity is intact». That would bode well 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 takeover of TSB.
The decline in household savings leaves borrowers with less of a cushion if incomes come under strain, putting the focus on how quickly banks recognise losses on unsecured lending. For now, lenders are watching the labour market and energy prices closely as they weigh whether existing provisions are sufficient.
4
