Banking sector

response to

coronavirus

outbreak

As of 8st June 2020

Banking Sector Summary

2

Summary and backdrop

Media and Commentator Sentiment

Policy initiatives impacting Banks

01

02

03

lansons.com | Banking Sector Summary 08/06/20

Summary and backdrop

As the lock-down continues to ease, the tone of the debate continues to focus on

the post-Coronavirus world and the ramifications of the measures taken on society and the economy longer term. The most pressing concern for many banks, as well as

for companies, is what proportion of the government backed Covid-19 support will be repaid.

The news last week from the Treasury that more than two-thirds of the £31.3bn lent to businesses under state-backed bailout schemes has been through light-touch

“bounce back” loans to the UK’s smallest companies was the focus of news and commentary. The tens of billions lent in just over a month since the scheme was

launched has caused concerns that many of these borrowers will be unable to repay debts, with senior bankers telling the Financial Times that as many as half could

default.

Underlining this concern, the Recapitalisation Group task force, led by TheCityUK, has

submitted an interim report to the Bank of England and Treasury warning that up to £36bn of government-backed Covid-19 business loans could turn toxic by next year.

It outlines a range of measures, include turning debt into equity or a profit tax, and introducing debt repayment holidays. A final version of the report, which is now out

for consultation, is expected by July.

This followed on the heels of a letter to banks sent by The Bank of England, informing

them that it will gather more information on their likely losses on loans due to the pandemic. The BoE’s Prudential Regulation Authority will gather the data ahead of

banks’ second quarter earnings to compare the timing and amount of losses with those it modelled last month. “This information will enable us to identify any

significant outliers and to further refine our estimates for future capital exercises,” deputy governor Sam Woods said.

Looking ahead, as the scale of this issue becomes clearer, it will present the banking sector with the dilemma of how rigidly it should pursue repayment of these loans. It is

largely acknowledged that banks must be profitable and must consider the impact of so many unpaid loans on their balance sheets. However, this raises a reputational

risk for the sector if it is too heavy handed in chasing up on these debts, many of which are held by small, family-run, local businesses.

Expectations of how banks are expected to behave was underlined by a letter to the UK largest financial institutions from Sir Jon Cunliffe, the Bank of England's Deputy

Governor for Financial Stability, telling them to suspend dividend payments and be kind to borrowers needing repayment holidays.

More broadly, front page focus at a policy and media level within the banking sector has centred on HSBC and Standard Chartered decisions to come out in

support of China’s policy in Hong Kong. Whilst some City media have noted the difficult position both entities find themselves in and the fact that the majority of their

profits are made in Asia, the majority of commentary has severely questioned the banks ethics and judgement. At a consumer level, the rise of calls to switch away

from HSBC and it’s subsidiaries such as M&S Bank and First Direct are likely to grow and the political pressure to mount.

lansons.com | Banking Sector Summary 08/06/20 3

Media and commentator sentiment

There has been a relative return to normality in how the media have covered the

banking sector over the last week, with generally less focus on Covid-specific topics, and a broader spread of stories. However, the level of potentially toxic debt due to

the Coronavirus loan schemes has been an ongoing story of interest.

The level of support banks are providing to other customers also continues to be

followed, as the special measures introduced are expected to be relaxed in the coming months. It has been reported that banks are in discussions with the Financial

Conduct Authority around extending the repayment holiday for customers struggling to repay credit cards and other unsecured debts until the end of September. This

follows the announcement last week that homeowners would be eligible for an additional three month mortgage holiday.

In relation to these stories, the Sunday Telegraph reported that banks are putting together teams of debt collectors in anticipation of defaults in the autumn when

these payment holidays and state aid schemes come to an end. Only two banks, Lloyds Banking Group and Barclays, have said they are not actively hiring new staff

to deal with anticipated defaults. This raises the prospect of banks receiving significant criticism over their debt collection practices if it is done in a too heavy

handed way. The media will be looking for examples of banks who do this in a responsible way, with due care for vulnerable customers.

The biggest ‘non-Covid’ story has been that on HSBC and Standard Chartered’sdecisions to back the new security legislation from Beijing in Hong Kong. While HSBC

is clearly in a difficult position, given its large presence in Asia, its decision has had undoubted reputational consequences. Customers have not been shy in making

their views felt, with many threatening to switch banks. A piece by James Coney at the Sunday Times highlighted the process by which customers could do this, as well

as pushing for investors to sell their holdings in HSBC if they disagreed with its stance. This position has been mirrored elsewhere, with several other articles criticizing HSBC’s

decision.

The press has also taken an interest in banks’ plans for emerging from lockdown. It

has been reported that Lloyds is expected to keep staff at home for longer, in line with other banks, as the industry brings as few people as possible back to the office.

A source quoted in the Telegraph said Lloyds is expected to delay a return to the office for some months after July. Barclays and Royal Bank of Scotland have already

told tens of thousands of staff they will return to the office until at least September.

The prospect of redundancies and restructuring, previously an issue that had been

frozen as banks grappled with more pressing issues, has resurfaced. While Lloyds has said it is to delay planned staff redundancies until at least October, this is in contrast

to HSBC who has said it will now be going ahead with its planned restructuring and associated job losses. Monzo was reported to be cutting up to 120 jobs, while much

more seriously, WIRED reported that Revolut staff are being coerced into accepting terminations in Poland and Portugal. More than 50 employees claim they have been

pressured to leave since the start of the COVID-19 pandemic.

lansons.com | Banking Sector Summary 08/06/20 4

Media and commentator sentiment

Other issues relating to Coronavirus include reports that the number of people in the

UK who are living “an almost cashless life” has more than doubled in two years, to 7.4 million. UK Finance data said changes in payment habits had inadvertently left the

UK better prepared to cope with life under lockdown than would have been the case a few years ago. They are likely to fuel concern about millions of people

potentially being left behind as the shift to a cashless society speeds up.

Nationwide faced some criticism in the Mail on Sunday from savers after reducing

the interest rate on its Instant ISA saver to 0.01pc on balances below £10,000. The interest rate on NatWest's Instant Saver and Lloyds's Easy Saver (accounts opened

since March 25) has also dropped to 0.01 per cent. This follows the unprecedented cut in interest rates by the BoE, which has piled pain on cash savers after years of

already low interest rates.

As with the last few weeks, there is little evidence of wholesale negative media

sentiment toward the banking sector. Any negative commentary tends to be in reference to isolated issues. The issue being most consistently covered is how banks

will absorb the potentially huge number of bed debts, as the country returns to normality. It is very possible that this will require further state action, but the banking

sectors’ actions will continue to be scrutinised closely.

lansons.com | Banking Sector Summary 08/06/20 5

Policy initiatives impacting Banks

Over the weekend, there have been widespread reports that the government is

preparing to shift its Covid-19 response and begin focusing on the recovery.

This follows a meeting between the Prime Minister, Chancellor and BEIS Secretary on

Wednesday when the impending job figures and economic impact became stark. In response the Prime Minister has ordered a swifter opening of the UK economy in

order to produce a “summer buzz”, with the opening of pubs and restaurants as well as negotiating travel corridors with other countries to enable summer holidays.

The announcements are set to be made this week, with a further economic stimulus package set to be unveiled by the Chancellor in July, which the government hope

will help the economy recover from the pandemic.

The governments new focus has been questioned by scientists who believe that the

easing of the lockdown is happening too quickly, with the infection rate close to or over one in some areas of the country and the threat of a second wave looming.

New Government announcements :

► New Apprenticeship Scheme – The Prime Minister has announced that every

young person in Britain will be guaranteed an apprenticeship.

► Eviction Suspension – Housing Secretary Robert Jenrick has announced a two-

month extension to the government's ban on evicting renters amid the Covid-19 pandemic. New evictions in England and Wales of tenants in both social and

privately-rented accommodation will be suspended until 23 August.

lansons.com | Banking Sector Summary 08/06/20 6