Yahoo Finance Banks won't profit from COVID-19 crisis: 'It's a question of how significant the losses will be'
Banks are likely to suffer losses as a result of the COVID-19 economic slump and will not profit from a government-backed loan scheme, according to the head of an industry group.
Stephen Jones, chief executive of UK Finance, told MPs on Wednesday: “I find it very hard to believe that the banks will profit from this crisis. I think it’s a question of how significant the losses will be.”
Jones, who was appearing remotely in front of parliament’s Treasury Select Committee, made the comment in response to a question about whether High Street banks’s central role in the government response to the crisis would allow them to profit from the disaster.
High Street banks have been called upon by the government to extend coronavirus business interruption loans (CBILs), state-backed loans to support small and medium-sized businesses. The government has agreed to cover 80% of any losses made on these loans.
READ MORE: Coronavirus: Just £1bn of promised government loans reach small businesses
Even given the government protection, Jones said banks were unlikely to make a net profit on the programme given the outlook for the UK economy. He pointed to the Office for Budget Responsibility’s modelling this week which suggested UK GDP could collapse by 35% by June and 2m more people could be out of work.
“Not all businesses will survive this crisis,” Jones said. “There were businesses that went into this crisis that were not strong. In a normal year over the last 5 years around 12% of all businesses fail and are wound up.”
Jones also said banks wouldn’t take advantage of distressed businesses in this crisis, as RBS was accused of doing during the 2008 financial crisis.
“I do think that the banking sector recognises that it needs to be part of the transmission mechanism for the solution in this crisis,” Jones said, adding that there was an “opportunity to really make good some of the ills of the past.”
Jones comments came as a string of US lenders warned of pain ahead. Bank of America (BAC) said in quarterly results on Wednesday its provision for credit losses had jumped to $4.76bn, the largest amount since 2010. Goldman Sachs (GS) also more than quadrupled provisions for credit losses to $937m as it posted a fall in quarterly profits. And Citigroup’s (C) first quarter profit slumped by 46% as it set aside $4.9bn to cover likely loan losses. Stock in all three banks was trading lower on Wednesday.
Earlier in the day, figures from UK Finance showed that UK banks have now extended £1.1bn worth of government-backed loans to over 6,000 small and medium sized companies. Business groups said more needs to be done to get money to firms faster to prevent a cash crunch at the end of the month.
“That number is a number we would like to see bigger,” Jones told MPs, referencing the lending numbers. “It’s a number we are working extremely hard to increase.”
Jones said the industry was “working 7 days a week, 24/7” to respond to the crisis, with thousands working over the Easter weekend. However, banks are facing an average absentee rate of 30% due to COVID-19 and have been overwhelmed by applications for support.
Jones added that banks still had to do credit assessments on businesses and not all would qualify for support.
“Ultimately banks are lending depositors money,” he said. “They can’t lend to businesses they perceive to be likely to fail through the crisis.”
