Q1 2020 Banking Results
COVID-19 – Responses of the UK’s Top 5 Banks
01/04/2020
The Revenge of the Bounce Back Loan
18/06/2020
Introduction
Questions surrounding the timing, shape and form of the next global recession were answered in the first quarter of 2020. The COVID-19 global pandemic and the subsequent economic lockdown that followed contributed to an unprecedented shock to the global market. The common theme attributable to the Q1 2020 UK banking reports was that of large write downs to loan books in anticipation of the negative consequences arising out of the pandemic. When comparing the COVID-19 shock to the financial crisis of 2008; the first thing to note is that banks are generally healthier now than they were 13 years ago. Their balance sheets are now much more robust with the insulation provided by solid solvency measures in the form of strong common equity tier 1 ratios (CET1). Post ring-fencing, UK banks that continued to operate chunky investment banking arms such as Barclays and HSBC were able to enjoy an uptick in investment banking profits due to the volatility in asset prices provided by the pandemic.
NatWest Group/RBS
NatWest Group/RBS saw its profit nearly halve in the first quarter of 2020 due to the ongoing uncertainty caused by the coronavirus outbreak. Profit before tax plunged from £1.01bn to £519m in the quarter, a fall of 49 per cent. Interestingly, if one strips out the impairment factor, (ie compares the quarter on quarter profit before impairment numbers per the interim management statement report), this number has increased to £1.3bn from £1.1bn in Q1 of last year.
Despite the fall in profits, the bank insisted it was in a “strong position” to deal with a significant economic downturn. The reasons posited were as follows;
1) The bank posted a very strong balance sheet with a CET1 (a core measure of financial resilience) of 16.6% – the highest amongst the bank’s UK peer group
2) This position was further strengthened by The Prudential Regulation Authority (PRA’s), request that UK banks suspend dividend payouts for 2020.
3) A robust response by the bank to the COVID pandemic – the bank has said it had given out £1.4bn in CBILS loans, representing circa 40 per cent of the total market.
Key challenges facing the group and the overall banking sector remain in the form of squeezed net interest margins (RBS posted a net interest margin (NIM) of 1.89% – 4 basis points lower than Q4 2019) ; macro uncertainty driven by the COVID pandemic and the translucent spectre of Brexit.
NatWest Group / RBS: Q1 Results
Lloyds
The UK’s largest lender printed a 95% reduction in profit before tax (from a quarter on quarter perspective) in Q1 2020. The profit before tax number of £75m is arrived at after the bank raised an impairment charge of £1.4bn in response to the COVID pandemic.
Despite the reduction in profits, Lloyds boasted the highest Net Interest Margin of all the UK banks coming in at 2.79%.
From a balance sheet perspective, analysts are quick to point out the improvement in the bank’s CET1 ratio – reported as 14.2% for the quarter. This should leave the bank adequately capitalised to weather the adverse economic impacts of the pandemic.
Interestingly, as the usual market leader in small business lending, Lloyds has come in for criticism in recent weeks, for not pulling its weight in the early stages of the coronavirus crisis and being overtaken by RBS and Barclays in the government’s Coronavirus Business Interruption Loan Scheme (CBILS).
Santander
The Eurozone’s second-largest bank by market value reported a profit of €331m (£288.5m) for the first quarter ended in March, after the bank set aside €1.6bn (£1.39bn) to offset the impact from Covid-19 based on the expected deterioration of the macroeconomic conditions arising from the health crisis.
Excluding extraordinary provisions, Santander’s underlying quarterly profit rose one per cent to €1.98bn (£1.73bn), coming in slightly higher than an average analyst estimate of €1.8bn drawn from a Reuters poll. As of end-March 2020, Santander posted a CET 1 of 11.58% slightly down on the 11.65% recorded at end-December 2019.
In other measures to preserve cash flow ahead of a probable recession across Europe, Santander has postponed its interim dividend and reduced pay for senior management due to the coronavirus pandemic, with chair and chief executive of the Spanish bank donating half their pay to a medical equipment fund. The bank is also reviewing its bonus policy “so that the maximum required resources are directed to supporting customers”.
HSBC
HSBC reported a profit before tax down 48% to $3.2bn for the quarter. Per the Q1 2020 earnings release, this reduction primarily reflects the global impact of the Covid-19 outbreak and weakening oil prices, as the expected credit loss/loan impairment number reported increased by $2.4bn to $3.0bn. The bank’s net interest margin (‘NIM’) of 1.54%,is down 2 basis points (‘bps’) from 4Q19 and down 5bps from 1Q19.
On the balance sheet, the CET1 ratio of 14.6% remained relatively flat (4Q19: 14.7%), with reserves receiving a further boost in the form of the cancellation of the final dividend in respect of 2019.
Analysts have noted that the bank’s underlying performance has been strong despite the impairments caused by COVID-19, the reasons being that;
1) Loan growth has offset pressure from lower interest rates.
2) Increased volatility in financial markets can actually be good news for the investment bank.
3) The bank’s capital base has been able to absorb the impairment and an increase in the risk profile of the bank’s loans without deteriorating significantly.
Barclays
Barclays’ profit has tumbled to £923m in the first quarter of 2020, down from £1.54bn in the same period last year, due to the coronavirus pandemic. This profit number was posted after the bank booked an impairment charge of £2.1bn, which it said reflected its “initial estimates of the impact of the pandemic”. Interestingly, analysts have noted that this impairment is roughly in line with HSBC’s own predictions for how badly coronavirus will hit it.
A stand out feature of the bank’s Q1 results is that the investment banking division benefited from global market volatility to report a huge 31 per cent profit jump to £1.2bn in the first quarter. One could reasonably expect this trend to continue to feature within the bank’s results for the remainder of the financial year.
On the balance sheet, the bank’s CET1 ratio – a core measure of financial strength – dipped to 13.1 per cent, down 0.7 per cent from the end of 2019. Per the group CEO, it is felt that any ratio above 10% remains the right target for the bank over time. Barclays has scrapped its 2020 dividend, in line with other UK banks, further contributing to balance sheet stability.
Finally, the bank said it had taken significant steps already to support the government’s efforts in backing struggling British companies through the crisis. As of April 24th, Barclays said that it had paid out £737m in loans for the coronavirus business interruption scheme, and approved 238,000 mortgage and loan payment holidays.
