OBSERVERS of the economic impact of coronavirus may be more interested than usual in the forthcoming reporting season for the major high street banks, which takes place towards the end of next month.
The last time Royal Bank of Scotland owner NatWest Group and Lloyds Banking Group, owner of Bank of Scotland, reported to the City, the message from bosses seemed to be that they had set aside enough provisions for bad debts arising from the crisis.
Reporting third-quarter results in October, NatWest declared its full-year impairments would be at the lower end of its £3.5 billion to £4.5bn guidance, noting that it had seen a “limited level of defaults across lending portfolios” in the third quarter. It echoed the stance adopted the day before by Lloyds, which said full-year charges would at the lower end of its £4.5bn to £5.5bn range.
The world has changed a lot since then, of course, and not least when it comes to coronavirus. Not long after NatWest and Lloyds reported, a second national lockdown was brought into effect in England, as infection rates of the second wave of coronavirus reached startling levels.
READ MORE: Coronavirus Scotland: Scott Wright: Gove was wrong: We need experts more than ever now
Since then, the broad pattern has been one of increasingly tough restrictions imposed on the functioning of the economy across the UK as a whole, notably since late December, when the danger of a new, more transmissible version of the virus took hold in the south-east of England.
The economic impact of the tough restrictions was laid bare in official data released last week, which revealed that UK gross domestic product had decreased by 2.6 per cent month on month in November. Responding to the figures, Shadow Chancellor of the Exchequer Anneliese Dodds declared the UK was in danger of a “devastating double dip” recession.
It is certainly the case that large sections of the economy have been placed under renewed pressure in the last couple of months, given the tighter restrictions they have been forced to operate under.
The support provided by the furlough scheme, currently in place until the end of April, continues to provide vital breathing space. But furlough alone is no guarantee of survival for businesses, notably in sectors such as hospitality, tourism, retail and aviation, given the other costs they must continue to bear while they are unable to trade. Government grants, while welcome, are simply too small to bridge the gap; some grant cash has still to be even distributed.
Bank chiefs will have been watching events unfold closely and, with still no sign of when the current lockdown will end, could well have factored in more headroom for the likelihood of more firms and indeed consumers defaulting on debt in the months and weeks ahead.
“The biggest risk [to banks] is the extended lockdown and [the prospect] of rising defaults,” Michael Hewson, chief market analyst at London-based CMC Markets, told The Herald recently. “We will be looking to see if the banks make extra provision for non-performing loans.”
READ MORE: Scott Wright: New lockdown kicks Scottish firms when they are down
That banks have been able to continue lending is one aspect of the current crisis that is different to the recession that followed the global financial crash of 2008 and 2009, albeit the UK Government is covering the bulk of the risk under coronavirus lending schemes. Speaking at a Scottish Chambers of Commerce event last week, Bank of England Governor Andrew Bailey said it was crucial that the banks continue to lend as the UK economy faces its “darkest hour”.
He observed the Covid-19 crisis has presented the first “very big test” of reforms made to the banking system since the financial crash, declaring that it has “so far come through well”.
“And that is important, because it means they have continued to lend, particularly over the last year,” he added.
“Having the banks exacerbate the downturn is a much more dangerous situation. We saw that during the financial crisis.”
One thing the banks will not be savouring, though, is the prospect of negative interest rates. The idea has been doing the rounds as a possible monetary policy stimulus measure to help the economy get back on its feet. While it could conceivably encourage businesses to invest, it would dent the margin-earning power of the banks, as well as further punish savers who have had very little to cheer on the interest front since the financial crisis.
Mr Bailey did not completely rule it out last week, but said there remain “lots of issues” with it.
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