How Is the British Financial Sector Performing Amid The Coronavirus Fallout?

The falling business activity levels in the country has put the British financial sector at serious risk. Not only is the industry heading towards the possibility of increase in its bad loans levels, but credit offtake in the country has also gone down significantly. Moreover, the reduced employee attendance due to the lockdown has placed businesses in difficult situation to manage their operations, leading to a risk of survivability for many of them.

Financial services trade body Confederation of British Industry (CBI) has today published a report which stated that the industry will see reduced demand, profitability and employment for the next few months on account of depressed sentiments induced by the coronavirus pandemic. During such periods of economic turmoil, financial services firms have been reluctant to extend loans as the repayment risk has become extremely high and the incoming interest earnings from existing loans has started to diminish. However, for a British Bank, who has the protection of the Bank of England as the lender of last resort, the situation seems to be relatively at ease while much bigger challenges have been placed before the non-banking license lenders.

The coronavirus pandemic since its arrival more than two months ago in the United Kingdom has caused significant damage to the economy of the country. The pandemic which has till now infected nearly 88,000 people in the country has forced the authorities to impose a nationwide lockdown. With people locked up in their houses, business activity levels in the county are at an all-time low leading to massive losses and reduction in employment levels in the country.

The British Financial sector has not been depicting a rosy picture since the past few years due to the country struggling through the economic turmoil, leading to slower activity level. Though the asset quality levels were of concern during the period, the uncertainty regarding a planned Brexit was of larger concern, which had led to the shrinking of businesses in the country as general public were unwilling to spend or make any forward investments. However, the ball started rolling towards the end of 2019 after the 12 December 2019 general elections results came out.

During the last quarter of 2019, the industry had registered growth for the first time after a four year decline. A survey was conducted among the British 94 banks, insurance companies and investment management firms by UK’s Financial Services trade body, CBI and accounting firm PwC acting as consultants. The survey found that the business volumes have grown significantly in the sector during Q4 2019 and it also forecasted the volumes to further rise in 2020 after the Brexit event scheduled for 31 January 2020 gets passed. But the forecast got disrupted with the onset of New Year as the novel coronavirus started spreading across the world with China being the epicenter.

The Bank of England just prior to the general elections date had conducted a stress test amongst most of the major banks in the country and had found that they were adequately capitalized and had sufficient funds with them to be able to see through any eventuality that 31^st January pullout might throw at them. This perhaps was the strongest possible motive force that saw a strong business off take in the industry.

In the initial stage, the year 2020 not only brought new hopes for the banking and financial services industry but also ushered in a new beginning for the British economy after a long and painful period. The consumer confidence index, house prices index and hiring index all have started trading in the positive zone by the first half of December 2019. With the improvement in business activity the expectations of the British businesses also started to increase, who now started to invest in future growth opportunities after a four year stagnation. Recruitment in the financial services industry also saw an upheaval at the beginning of the year, another sign that the industry is in a strong footing which was followed by one of the primary business segments of the industry; the mortgage segment seeing a massive increase in the number of transactions in the beginning of the year. The jump in mortgage numbers in the country was not just seen as a sign of improving business sentiments, but also a release of the pent up demand in the sector that had accumulated over the past several years. Pent up demand from people who had postponed their home buying decisions and other capital investment decisions by businesses who now saw the environment improving in the country and now are making forward investments to take advantage of the same. In the month of January 2020 the country witnessed a record number of mortgage transactions that was the highest in ten years.

However, all this euphoria, all the green shoots were short-lived. They were all nipped in the buds by the mid of February as the coronavirus pandemic while creating havoc across the world had arrived in the British shores. As per the financial regulatory bodies, the British economy will most likely enter a recession and the business activity levels in the country would stand at an all-time low. The government has mandated that stress not to be placed on lenders who have been struggling because of the pandemic induced slowdown, and have encouraged lending more to such businesses so that they may stay afloat while the pandemic storm passes over. It has thus become extremely challenging for the sector to trade in these conditions. The pandemic which is expected to continue for some more months could very well put a big dent in the bottom lines of these companies.

The one ray of hope for the financial services sector could be the massive bailout funds being rolled out by the British government in the past one month. The banks are being asked to take these government schemes to the last intended users. It is highly likely that some of these funds could be channelized through the non-banking financial services firms. Moreover, the guarantees being given by the government helps the industry to bring down their risk levels which could prompt them to lend further.

The market expects that though an industry could have an improved turnover and revenue levels either during the later part of 2020 or in 2021, as of now the ability to deal with the uncertain economic environment plays a crucial role in determining the financial health of the majority of companies.

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