How are Banks Coping with The Unprecedented Reduction in Consumer Credit due to Covid-19?

Summary

• British banks are under pressure due to plummeting credit demand
• People have been repaying their debt with the saved money due to lockdown
• Businesses are however seeking credit to meet the exigencies due to Covid crisis
• Some major banks have been trying to maintain strong cost discipline

Due to the economic impact of the outbreak of Covid-19, the borrowings have certainly declined amid lockdown. The unprecedented economic crisis and uncertainties caused by the pandemic, has led the demand for credit to plummet substantially. In addition, banks are finding it difficult to complete their documentation and underwriting with respect to loan disbursement in these turbulent times, due to lower staffs and social distancing measures.

In April, the UK households have paid off £7.4 billion in their non-mortgage loans and credit card bills, according to Bank of England. This is an unusual event and was non-existent in the pre-Covid era. This indicates that the consumers are taking a prudent approach while spending and saving more, as they tend to get warier about the uncertainties posed by the outbreak of the novel coronavirus.

In addition, with most of the economic activities coming to an abrupt halt, the consumers had few options to spend on. Since they were left with more money in the pocket, they chose to clear their dues. Similarly, even if they had taken loans, there would be very little opportunities to spend or invest. On the other hand, the UK businesses took a credit of £8.4 billion in April. Businesses are seeking credit to ensure liquidity and sustainability in these turbulent times.

Adding to the woes of the banking sector, Britain’s regulator for financial markets, the Financial Conduct Authority (FCA) had announced a three-month moratorium on consumer credit products such as credit cards, personal loans, and overdrafts. The consumers are required to make minimum payments for their credit card bills and might even request the lender for a deferral, while the lender on their part is not supposed to charge any fee for deferral. The FCA had issued similar guidelines for personal loans. The FCA had also asked the lenders to wave interest charges on an overdraft facility of £500 with certain conditions.

Banking is the backbone of the economy and has a major contribution towards its growth. The banks play a key role in driving the currency and financial stability in a country. Their primary revenue comes from the interest payment made by the borrowers. The banks generate secondary revenue from fee- based ancillary services.

Banks are as important as credit for an economy, with the central bank already slashing the interest rates; their morale is at an all-time low. Usually, the scenario created should have resulted in increased credit levels, but that is not happening.

With consumer credit decreasing, lesser interest rates, and the moratorium imposed by the FCA, the bank’s revenue streams has come under immense pressure. Also, there has been a significant decline in cross-selling of its ancillary products & services of the banks during the lockdown, which can be called a double whammy for a bank.

Moreover, the stimulus packages announced by the British government such as Bounce Back Loans and other similar schemes, are facilitated through the existing banking system. These schemes offer flexibility in terms of loan repayment schedules and timelines. With a surfeit of uncertainties in the UK’ economy, the overall lending of the banks have already increased. The government must intervene to ensure that these assets should not convert into non-performing assets or bad assets, else it could trigger another financial crisis.

Let us discuss some prominent banking businesses and their performance.

• Barclays Plc

Financial services group, Barclays Plc (LON:BARC) is engaged in the retail and wholesale banking, credit cards, investment banking, wealth, and investment management services.

The Company reported a resilient performance during the first quarter of 2020 despite challenging headwinds presented by COVID-19. However, 2020 seems a challenging year for the Company due to the low-interest rate environment.

On a Year to Date (YTD) basis, the stock delivered a negative price return of 32.33 per cent. The company’s share prices have slumped drastically, which has nearly eroded 33 per cent of the market capitalisation. This also means that the stock has undergone steep price correction.

On 4th June 2020, while writing at 08:30 AM, before the market close, Barclays Plc’s shares were marginally down by 1.33 per cent against its previous day closing price; trading at GBX 123.66. The stock's 52 weeks High and Low was GBX 192.46/GBX 80.24. The beta of the company stood at 1.4, indicating higher volatility as compared to the benchmark index. Barclays Plc’s market capitalisation stood at £21,732.54 million.

• Metro Bank Plc

FTSE All-share group, Metro Bank Plc (LON:MTRO) provides banking and related services in the United Kingdom. During the first quarter of 2020, the bank’s deposits grew by £77 million. 2020 seems a challenging year for the banking sector. However, Metro Bank, due to its limited exposure to unsecured lending, is likely to be least impacted in the prevalent lower interest rates scenario.

On a Year to Date (YTD) basis, the stock delivered a negative price return of 64.39 per cent. The company’s share prices have slumped drastically, which has nearly eroded 65 per cent of the market capitalisation. This also means that the stock has undergone steep price correction.

On 4th June 2020, while writing at 08:35 AM, before the market close, Metro Bank Plc’s shares were marginally up by 1.56 per cent against its previous day closing price; trading at GBX 75.66. The stock's 52 weeks High and Low was GBX 669.50/GBX 71. The beta of the company stood at 1.22, indicating higher volatility as compared to the benchmark index. Metro Bank Plc’s market capitalisation stood at £ 128.45 million.

• Standard Chartered Plc

Standard Chartered Plc (LON:STAN) is a British multinational banking company, with headquarters in London, the United Kingdom. In recent times, the banking sector has been facing troubles with increased pressure on credit quality. Due to the economic impact of the rapid spread of COVID-19, the credit impairment has gone up significantly. However, the Group has maintained strong cost discipline and delivered good income growth of 6 per cent in the first quarter of the fiscal year 2020.

On a Year to Date (YTD) basis, the stock delivered a negative price return of 40.65 per cent. The company’s share prices have slumped drastically, which has nearly eroded 40 per cent of the market capitalisation.

On 4th June 2020, while writing at 08:41 AM, before the market close, Standard Chartered Plc’s shares were marginally up by 0.68 per cent against its previous day closing price; trading at GBX 430.20. The stock's 52 weeks High and Low was GBX 738.60/GBX 368.40. The beta of the company stood at 1.37, indicating higher volatility as compared to the benchmark index. Standard Chartered Plc’s market capitalisation stood at £13,486.37 million.

Comparative chart of BARC, MTRO, and STAN

(Source: Thomson Reuters)