Barclays And Natwest Group in Focus as Business Borrowing from Banks Surge Fivefold

Summary

• Net borrowings by the businesses in the UK has gone up drastically amid the pandemic
• Banks are under pressure as they provided payment holidays and waived ancillary charges
• In the present scenario, the banks need to roll-out sector-specific guidelines for debt recoveries and negotiations

According to leading consultancy firms, the net borrowings by businesses in the UK to survive and navigate through the pandemic could increase manifolds in 2020 in contrast to the previous year. As most of the economic activities came to a screeching halt, the majority of the businesses suffered a liquidity crisis and sales slump. To come out of this situation and remain afloat during the pandemic, the businesses across the UK have borrowed in huge amount. Another reason for increased borrowings were lesser interest rates, the apex authority, Bank of England (BoE) had slashed interest rates to 0.1 per cent, an all-time low in March (during the peak of unprecedented crisis). Notably, lessened interest rates will surely impact the top-line of the lenders. The fact that these loans were backed by the government led to a larger subscription by the businesses.  

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Most of these loans were critical to a vast majority of firms and came with repayment holidays for a period up to a year. Industry experts suggest that second lockdown, rising unemployment and other geopolitical risks could weigh down heavily on the small & medium scale businesses. This could also mean that businesses could find it difficult to reduce their borrowing and repay debt until 2022. It is interesting to note that the business loans have increased substantially due to crisis induced by the pandemic; however, the consumer borrowing has dipped substantially. The consumers are looking forward to saving cash and refrain from making unnecessary expenditures as they expect the turbulence to continue for some more time.

Nearly £38 billion was disbursed as loans under the state-backed schemes to help more than 900 thousand businesses to hedge against the catastrophic impact of Covid-19 induced lockdowns and navigate through the coronavirus crisis, according to figures released by the treasury in June. Around 33 per cent of this debt could turn to NPA’s (non-performing assets), which is not a good sign for UK’s lenders.

The remaining 66 per cent of the debt, which accounts to nearly £107 billion lies on the balance sheet of the small and medium-sized businesses, which are at risk with a second lockdown and the continuous economic fallout. The major chunk of debt Is at risk for banks, and this could lead to degradation of asset quality and bad assets by March 2021, eventually. Notably, repayment holidays and credit moratoriums had been already hurting the top-line of the lenders.  

The banking sector must protect its asset quality by chalking out a proper plan. It is important to note that not every sector is hard-hit, and the banks need to roll-out sector-specific guidelines for debt recoveries and negotiations. Another lockdown has sparked fresh fears of assets turning bad, and the crisis is expected to continue for quite some time now.

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This has led the UK based lenders braced for losses. Here we would discuss through the Covid-19 debt exposures of two top UK based lenders.

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• Barclays Plc (LON: BARC)

The FTSE 100 listed lender has funded £25 billion to non-financial UK businesses through the government support measures. The lender had lent £9.2 billion in the form of 296,000 Bounce Back Loans, £12.4 billion through the CCFF (Covid Corporate Financing Facility) and nearly £3 billion under the CBILS programmes. The lender underwrote over £1 trillion of new issuances during the second & third quarter of 2020 and has helped businesses and institutions with access to global capital markets.

In addition, the lender has provided over 640,000 payment holidays globally and has also waived some £100 million of income in the form of overdraft interest and banking charges for its business banking clients and customers in the UK as a gesture of support for Covid-19. BARC shares last traded at GBX 107.04 (on 2 November 2020), marginally up by 0.45 per cent from previous day’s closing price.

• NatWest Group Plc (LON: NWG)
  
  

FTSE 100 listed lender aims to lent support to its customers through the coronavirus pandemic, while adhering to a disciplined approach to risk and value creation. NatWest Group lent around £13 billion through the state-backed schemes. The lender helped UK businesses with £8.8 billion of Covid-19 Corporate Financing Facilities (CCFF). In addition, the bank has provided payment holidays on over 72,000 business accounts and has helped nearly 250,000 customers with an initial mortgage repayment holiday.

The lender has also served the society by offering grants to organisations across the UK that employ people from vulnerable or disadvantaged groups along with setting up a £1 million Coronavirus Response Fund. NWG shares last traded at GBX 120.05 (on 2 November 2020), down by 3.34 per cent from previous day’s closing price.

Another lockdown may prove a disaster for the ailing banking industry. The small and large businesses are already in distress by the economic fallout caused by the coronavirus pandemic, and their situation could deteriorate further with the second lockdown. The banks on their part should negotiate with the ailing businesses to chalk out a plan in order to boost their recovery.