Coronavirus has left the UK banking sector has a tightrope to walk.
The lockdown imposed to slow the spread of COVID-19 will inflict vast damage on the economy.
Memories of how bankers became hate figures following the financial crisis have undoubtedly informed the sector’s response.
To avoid a repeat of what happened after 2008-09, banks have genuinely sought to lend to customers, both households and businesses.
This was tempered, though, by a desire not to lend indiscriminately.
That explains the initial criticisms of the banking sector after the Chancellor Rishi Sunak, unveiled the Coronoavirus Business Interruption Loans Scheme (CBILS) in his March Budget.
It quickly became apparent that some business owners were being denied loans under the scheme because banks were seeking personal guarantees from them.
Concerns were also raised about the interest rates the banks were proposing to levy on loans after the end of the first year – when the government guarantee expired.
And there was also unhappiness that the government guarantee only covered 80% of the loan, rather than 100%, as in Germany.
Gradually, the wrinkles in the scheme have been ironed out, with banks now not allowed to demand personal guarantees for loans under £250,000.
The banks were also ordered not to charge usurious rates after the first year.
And, earlier this week, Mr Sunak agreed that all loans under the scheme under £50,000 would be guaranteed by the taxpayer.
It will only become clear over time how effective these moves have been at clearing the log-jam in processing applications – a snarl-up also caused by illness and self-isolation among bank employees.
In the meantime, this week’s quarterly reports were a good opportunity to measure the financial health of the UK’s banks, in particular the sums they faced having to write off to cover loans now unlikely to be repaid either in full or in part.
This was a particularly thorny issue for the banks – as they were being warned not to be overly conservative in provisioning in case it eroded capital levels and reduced their ability to lend.
So how have the banks done?
On the whole, to judge by the share price reaction, reasonably well – despite the fact that the big four – NatWest/RBS, Barclays, HSBC and Lloyds – set aside a combined £6.7bn this week to cover expected defaults.
Barclays, as expected, left its shareholders most happy when it reported on Wednesday.
The volatility in financial markets benefited all of the major Wall Street players and, as the UK bank which has a bigger corporate and investment banking division, Barclays cleaned up too.
Earnings in that part of the bank during the first three months of 2020 shot up by 44% on the same period last year and helped cushion the wider impact of coronavirus on the bank.
Barclays reported a 38% drop in quarterly pre-tax profits, to £923m, part reflecting a £2.1bn bad debt provision.
Barclays shares rose by nearly 13% on the day.
A day earlier HSBC, which kicked off the reporting season, had reported a 48% drop in first quarter profits to $3.2bn as it raised its provision for souring loans to $3bn.
The comparison with the other UK lenders is not a precise one because HSBC makes the vast majority of its profits in Asia, the first area to be struck by coronavirus, but in its UK ring-fenced bank – the high street banking division – quarterly pre-tax profits fell by just 30% to $369m.
HSBC shares rose by 2% on the day.
Today, Royal Bank of Scotland – which later this year changes its name to NatWest Group – also satisfied investors, despite a 49% in quarterly pre-tax profits to £519m.
That, too, reflected the impact of an £802m provision to cover loans which may sour.
Its shares have risen by as much as 6% today despite news that the bank is closing Bó, its digital-only bank, just five months after it launched at a cost of more than £100m.
Ian Gordon, the banking analyst at broker Investec, said that, following the recent cancellation of its dividend, RBS was carrying an “extraordinary” amount of capital on its balance sheet: “Despite our current expectation that RBS will be loss-making in the 2020 financial year, we expect it to continue to carry material excess capital which should be a source of future capital return for the (very) patient investor.”
Standard Chartered, the London-listed but Africa and Asia-focused, also exceeded expectations when it reported on Wednesday.
That leaves Lloyds, the UK’s biggest provider of mortgages and current accounts, which was sadly this biggest disappointment in this reporting round.
The bank, which has a greater domestic focus than any of its peers, took a bigger than expected provision of £1.43bn – sending pre-tax profits for the quarter down by 95% to just £74m.
It alone among its peers saw its shares fall on the day of its results announcement with a decline of more than 7%.
Apart from the loan provisioning, the main standout this week was the way all of the banks – mindful of the financial crisis – were careful to highlight their social contribution at this time.
For example, Jes Staley, the Barclays chief executive, spelled out to investors how the bank had already granted repayment holidays on 94,000 mortgages and 57,000 personal loans.
He even said the bank had been proactively identifying NHS and other key workers among its customer base and moved them to the front of call queues.
He gave a Staffordshire brewery and a Bath hotel and restaurant as examples of small businesses to which Barclays had granted CBILS loans.
Noel Quinn, the new HSBC chief executive, highlighted how the bank had already granted more than 118,000 repayment holidays to UK customers.
He also pointed out that HSBC had accounted for 17% of all CBILS lending – nearly double the bank’s share of SME lending.
RBS, under its new chief executive Alison Rose, is also punching well above its market share in terms of the CBILS loans it has granted.
All of which has created a problem for Antonio Horta-Osorio, chief executive of Lloyds, which has only granted an estimated 12% of CBILS loans despite a market share of almost 20%.
Mr Horta-Osorio argued that the bank’s business customers had been asking for repayment holidays and overdraft extensions rather than CBILS loans.
He backed this up by pointing to the 880,000 loan repayment holidays that the Black Horse bank had provided.
It seems, though, that questions about the bank’s commitment to CBILS, easily the data point on which politicians are most fixated, will not go away yet.