Are UK Banks Seeking New Avenues to Overcome the Business Falloff?

Summary

• Barclays bank in vying to buy General Motors’ credit card division as it looks to increase its market share in consumer banking
• Metro Bank recently ventured into peer to peer lending by acquiring ‘RateSetter’
• Fintech company, Zopa Group was recently awarded a full banking license by FCA

The Banking and financial sector has been under pressure like any other industry since the nation started witnessing the onslaught of the coronavirus pandemic. The engines of the economy have been the epicentre of loan disbursal through state backed schemes. Moreover, with all-time lesser interest rates prevalent in the economy, the interest income of major lenders in the UK is already under pressure in the near term.

Banks play a major role in controlling the flow of credit in the economy. If the flow of credit slows down or is disrupted, this could trigger another financial crisis. 2020 has been a disastrous year in terms of economic prosperity around the world. The coronavirus pandemic has devastated the economies and made the world poor. UK has slipped into recession as its GDP has fallen by 20.4 per cent in the quarter ended June 2020, according to the Office of National Statistics (ONS). Industry experts believe that inflation is likely to kick in soon in the upcoming months. The true picture would become clearer once the British government calls off the job retention scheme by the end of October 2020. These factors paint a very gloomy outlook of businesses in the UK.

Do read: UK has slipped into Recession

According to industry experts, consumer lending is likely to fall steeply in 2020 as the GDP of the UK has fallen over by more than one-fifth. The economic forecasting arm of the accounting firm, EY has predicted a slump in consumer lending by nearly 16 per cent. The recession-induced by the novel coronavirus has made lending difficult for the banks. All the state backed schemes came along with credit moratoriums. Moreover, the processing fee was also negligible/ exempted or waived, if any. The consumers are into savings mode and spending only on essentials given the uncertain economic scenario.

Banks count on mortgages for their bread and butter. Recently, the Chancellor of the Exchequer, Rishi Sunak announced stamp duty holidays. British financial institution, Nationwide Building Society announced lower deposit mortgages after the Chancellor announced the stamp duty move. Major banking groups in the United Kingdom like NatWest Group, Lloyds Banking Group and TSB Bank have decided to offer customers mortgage holidays to help them cope with coronavirus induced disruptions to businesses.

On the flip side, consumer credit has declined substantially. During the four-month period ended June, Britons repaid £15.6 billion of consumer credit, according to data figures from the Bank of England. Although the asset (loan) size of the bank has increased substantially due to the facilitation of state-backed loans, there is a probability of these assets turning bad. Therefore, UK lenders have set aside billions of pounds during the second quarter of 2020 to cover against potential defaults and protect their asset quality.

How are the UK lenders coping up with the situation?

Despite the carnage in the banking sector, UK lenders are trying hard to sustain themselves and seeking new ways to generate revenue streams. According to some media reports, Barclays Plc (LON: BARC) is looking forward to buying General Motors Co’ credit card division as it looks to increase its market share in consumer banking. General Motors, the renowned automaker’s credit card business has outstanding balances of billions of dollars. On 14 August 2020, at the time of writing (before market close, GMT 10:27 AM GMT+1), Barclays Plc’s shares were 1.30 per cent down from its previous day closing price and were trading at GBX 106.68.

In a bid to enhance its unsecured lending capability, Metro Bank Plc (LON:MTRO) recently announced the acquisition of P2P lender, RateSetter (Retail Money Market LTD) for a deal which could be valued between £25-£50 million. On 14 August 2020, at the time of writing (before market close, GMT 10:29 AM GMT+1), Metro Bank Plc’s shares were 1.73 per cent down from its previous day closing price and were trading at GBX 103.95.

Do read: Financial Highlights of selected Banking Stocks of the United Kingdom

P2P lending has its own advantages. In most of the cases, P2P provides higher returns to lenders in comparison to other debt instruments. P2P lending has a deeper penetration in comparison to conventional purpose-driven loans offered by the banks. It is easy for the borrowers with a lesser credit score or financially excluded people to avail loans under the P2P framework. However, P2P investments are subjected to much higher credit risk in comparison to conventional debt instruments. Since there is no financial intermediary in between, the lender should be aware of the default probability of the borrower.

Metro Bank is trying to get some ground in the emerging space of unsecured lending. Acquisition of RateSetter is a strategic move to diversify its portfolio of assets and enhance returns. Metro Bank group would like to leverage upon the underwriting capability of the P2P lender and build growth on an existing, scalable platform. The bank expects to improve its lending yield in the unsecured loans vertical by leveraging upon the acquisition on P2P lender. Metro Bank would offer loan products under both the RateSetter and Metro Bank brands and is likely to operate RateSetter as an independent platform.

The banking sector is also likely to see some competition in the times to come. A few months ago, a P2P lender, Zopa Group was offered a full banking license by the FCA. The Fintech Group would offer banking services as a separate vertical under the name Zopa Bank, in contrast to its existing P2P lending services. The offerings of the new bank would be backed by FSCS (Financial Services Compensation Scheme), which is a statutory deposit insurance and investors compensation scheme.

It has been a ‘double whammy’ for the banking sector, given the current economic outlook. Firstly, dampened economic activity would severely impact the flow of credit in the economy. Secondly, the interest income and fee-based income of banks have been hit due to lesser interest rates, processing fees and mortgage holidays. In these pressing times, banks need to figure out innovative ways to get revenue through the doors.