Bank & Non-Bank Lenders
Sector trends & challenges
Non-performing loans increase
As government support comes to an end, the lasting impact of the pandemic is likely to drive growing financial distress across both B2C and B2B, resulting in increased bad debt provisions and non-performing loan levels.
Regulation and IT
Regulation is evolving, with growing focus on data protection and protecting against cybercrime. Upgrading IT systems to meet latest requirements remains a complex and expensive exercise, but one that is essential for robustness.
Threat to low interest rates
The ultra-low interest rate environment has persisted through the COVID-19 pandemic and may continue into 2022, although there are a number of factors that might see rates rise in the next 12-18 months.
Sector rating profile
The sector stress has increased in recent years as PPI compensation costs impacted on the bottom line. The low interest rate environment has continued to place pressure on margins, as have continued changes to regulatory requirements.
Bank & Non-Bank Lenders
The response by the banking sector to the COVID-19 crisis has been critical in supporting the wider economy, and funding from lenders will be essential in ensuring UK businesses can begin to accelerate growth again. The rapid administration of Coronavirus Business Interruption Support loans (CBILS and CLBILS) as well as Bounce Back Loans (BBL) have been essential in providing much-needed liquidity to businesses across the UK, and banks have played a key role. The sector has also supported retail consumers through increased forbearance and providing extra assistance to vulnerable customers.
As the economy starts to recover, banks will continue to play a pivotal role supporting UK businesses and consumers. There is a likelihood that non-repayment of both personal and commercial borrowings will increase. Although CBILs, CLBILs and BBLs are largely underwritten by the UK Government, repayment of other lending may be limited. There is also likely to be strong political pressure to continue supporting viable businesses and vulnerable customers. This is likely to result in increased bad debt provisions impacting the bottom line.
Looking beyond COVID-19, the sector faces a number of ongoing challenges:
IT upgrades. Particularly across the established clearing banks, IT infrastructure is in need of continued investment to meet the demands on online consumers, the threat from cyberattacks, and regulatory requirements.
Increasing interest rates. Although a low-interest rate environment tends to impact banking margins, the decade-long spell of record low interest rates. If rates are increased to limit inflation, banks may face bad debts on mortgages that customers can no longer afford.
Regulatory requirements. The regulatory environment continues to evolve, especially following the UK’s exit from the European Union. Banks, especially those operating across borders, will need to continue working proactively to meet regulatory deadlines.
Managing costs. Keeping a lid on costs will remain a core priority for the sector, especially as smaller challenger banks seek to target more profitable customers from established competitors.
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