THE owner of Royal Bank of Scotland has throughout the coronavirus pandemic been eager to emphasise that it is in a very different position to the one it found itself in during the last recession.

Whereas the Edinburgh-based bank was under so much pressure during the global financial crisis of 2008 and 2009 that the UK Government had to save it with a bailout worth £45.5 billion, its capital position is providing no immediate cause for concern now. Indeed, top brass at the recently renamed NatWest Group, which remains 62.4 per cent-owned by UK taxpayers, are keen to stress that the bank is very much “open for business”.

And to be fair to the bank it does very much look like it has stepped in to support customers faced with the existential crisis Covid-19 has brought.

When it unveiled its first-half results on July 31, the bank said it had lent £10.1 billion to 190,000 of its customers under various government schemes to support businesses during the pandemic. Of that total, £6bn had been released in the form of bounce back loans, and around £3bn had been issued under the coronavirus business interruption loan scheme.

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While chief executive Alison Rose declared it was comfortable with the level of risk in its loan portfolio, the institution did make hefty provisions for bad debts to reflect the bleak outlook for the economy, booking an impairment charge of £2.9bn that sent it to a first-half loss of £705 million. Ms Rose said NatWest expected impairments for the full year to be in the region of £3.5bn to £4.5bn.

And it has not been alone in taking such steps, with Bank of Scotland owner Lloyds Banking Group setting aside a further £2.4bn to cover loans going bad in the same week. Lloyds said then that it expects charges for Covid-related losses to come in at between £4.5bn and £5.5bn for the full year.

Despite the provisions, Ms Rose said NatWest’s capital position was strong and would allow it to “return capital to shareholders as soon as that is possible”. This was a reference to the current dividend hiatus that all of the UK’s major banks have been asked to observe by the Prudential Regulation Authority, as the watchdog looks to ensure they are suitably capitalised to withstand the crisis.

However, the ability to pay dividends is not the only concern UK banks have in an economy ravaged by the coronavirus. Net interest margins, which in simple terms reflects the difference between how much interest a bank charges on loans and what they pay in interest to savers, were already trending downward before the Bank of England cut the base rate to a historic low of 0.1 per cent in March, as the impact of coronavirus was becoming abundantly clear.

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And with talk of the Bank of England contemplating a move into negative interest-rate territory, as it mulls further monetary policy moves to stimulate the economy, the situation is not likely to improve any time soon.

“You look at the net interest margin – the difference between what they lend at and what they borrow at – and it is continuing to come down,” said Michael Hewson, chief market analyst at CMC Markets.

“You look at the UK gilt market, and the fact the two and five-year yields are in negative territory again. That magnifies the impact on their margins.

“It does not help that the Bank of England is talking of the prospect of negative interest rates, which I think will be completely destructive for the UK financial sector. It would be foolhardy in the extreme – and I do not use those words lightly.”

Mr Hewson argued that negative interest rates have failed to have any effect in Japan or Europe, and send the wrong signal to savers.

“If negative interest rates were the answer, then Japan and Europe would be booming, ” he said. “They are not. Actually, they are creating negative feedback, because the more you cut rates, the more you are sending a message to consumers that you are not confident in the economic outlook.”

He added: “Ultimately, human beings need incentives. You can’t force people to spend money they don’t have, no matter what the interest rate is. If they are concerned about their job they are not going to go out and spend money.”

There is a view that NatWest and Lloyds, which have seen their share prices tumble amid the coronavirus fallout this year, are being hampered by a lack of diversity in terms of their income-earning potential.

In the aftermath of its bailout, Royal Bank of Scotland gradually scaled back its global presence and the breadth of its operations, selling off prized assets such as US bank Citizens and the Worldpay payment processing business to rebuild its balance sheet.

Increasingly, it has become a domestically focused player, which is underlined by the ongoing downsizing of the NatWest Markets investment banking operation under Ms Rose.

The bank is looking to shrink the operation by around one half, amid suggestions Ms Rose is trying to distance the institution from the “casino banking” days that prefaced its near-collapse.

Around 130 redundancies were made at the division, which employs around 5,000 people, in March and April, while it was reported at the weekend that more jobs were at risk under moves to merge certain departments with the rest of the group.

Cuts are also continuing to be made to the retail operation, with the bank announcing last week that 550 jobs are to go at branches across the UK.

For observers such as Mr Hewson, the retrenchment of NatWest Markets is a negative step. “If the last 10 years has taught us anything, it’s that if you have a diversified banking model you generally tend to do better. Barclays has proven that with its performance in the last two quarters. Its investment bank has actually helped it generate some decent profits.

“We saw that with the US banks – those with diversified revenue generation capabilities were able to actually offset the slowdown in the retail banking system. Lloyds Bank, along with NatWest, is much more exposed to the UK economy.”

Mr Hewson added: “People talked about casino banking being the arbiter of the crisis for the last 10 years. It was not. The arbiter was mortgage-backed lending, which was packaged up into tranches, labelled as triple A when it clearly was not.

“It was basically financial engineering on steroids – it was nothing to do with fixed income, foreign exchange or commodities trading. That was a narrative that was spun by politicians who basically wanted someone to blame.”