"The larger banks with greater capital are likely to be able to withstand losses, but will that be the same for the newer banks, especially those that grew so rapidly off the back of CBILS and BBLS?"
If the last two years in business have been dominated by the impact of Covid-19, the next few years will be spent dealing with the after-effects of the pandemic and the initiatives put in place to cope with it.
Covid has caused unprecedented changes to the way we live our lives and how businesses operate. In order to keep the economy going the Government introduced a myriad of schemes to help firms stay afloat. The scale has been eye-watering: currently, according to its own figures, the amount of money provided under the various Government bounce-back and Covid-related loan schemes totals more than £79 billion.
Some of the big banks were initially criticised for rejecting too many Coronavirus Business Interruption Loan Scheme (CBILS) applications as they applied their standard pre-pandemic checks. By comparison, some of the challenger banks were keen to offer CBILS.
Research from BDO found that lending by UK challenger banks hit a record high of £143 billion last year, up 11% year-on-year. The research said the growth of the challenger banks’ loan books had been boosted by lending to businesses through both CBILS and the subsequent Bounce Back Loan Scheme (BBLS).
While these banks served an important purpose supporting the Government’s Covid response, inevitably there will be questions in the future over the performance of those loans and the companies who took them. We need to be realistic that some of the businesses that applied for CBILS and BBLS may already have been in difficulty before coronavirus struck. Government-backed loans may have been helpful, but they are likely to have struggled even more during the pandemic itself.
There is growing concern in the banking sector around how many of those CBILS and BBLS loans will go bad and what impact this will have on lenders. The larger banks with greater capital are likely to be able to withstand losses, but will that be the same for the newer banks, especially those that grew so rapidly off the back of CBILS and BBLS?
Although the loans are underwritten by the Government, it will still expect the banks to do all they can to get their money repaid or recovered. This is not “free money” in any sense.
Many SMEs who took advantage of Government loans might not have needed it immediately, but instead banked it because they were unsure how long and how deep the crisis would go. Business deposits rose by as much as £34bn per month in the early stages of the pandemic, according to Bank of England figures. As the economy recovers, re-payment will probably be easier for these firms, even if they choose to use it as low-interest funding for business investment or future business challenges. After all, it’s clear that Covid isn’t going anywhere soon.
Although we weren’t involved in CBILS or BBLS directly, we are working with customers who did make use of the schemes, such as a professional practice client in the engineering sector. It is a solid business with a customer book of global blue-chip companies, but its customers were slower with their payments during the early stages of the pandemic. As a result, our client took out a Government loan to support its cashflow.
As it emerged from the first year Covid, the client came to us for a professional practice loan to help finance its professional indemnity insurance premium. We took the view that it was a successful and well-run business with a strong order book. Its use of Government support actually demonstrated its fiscal responsibility, so we were happy to approve the loan.
However, this won’t be the case for all businesses rebuilding after the pandemic, so what impact will it have on those banks and lenders, who, unlike us, have high exposure to CBILS and BBLS?
We have witnessed a number of new banks and financial providers coming to the market in recent years, often generating huge valuations driven by massive growth in customers. But there is still a question mark over their profitability and the viability of their business model. The challenger bank sector is facing its first major economic challenge and we are yet to see how it will play out. Will they be able to cope with future losses from bad loans? Could we even start to see consolidation in the sector as a result?
I’d argue that those new entrants that rely on a fully digital proposition will start to see some of the weaknesses of their business model reveal themselves. Unlike a bank such as Recognise, which blends technology with experienced people, they won’t necessarily have the expertise or experience to manage under-performing debts, while continuing to lend to an SME sector that is even more complex financially.
With the new Covid strain whitling away at those hard-won freedoms, we as individuals are again having to adapt to a new reality, and business – the financial sector included – is having to do the same. So 2022 could be the year that we start to see the shine come off some of the new entrants in the banking sector, while other banks that have taken a different approach, such as Recognise, continue to grow.