NatWest Group sank into a loss last year after setting aside billions of pounds to cover loans that could turn sour amid the pandemic.
The bank - formerly the Royal Bank of Scotland and still 62% taxpayer-owned - posted a pre-tax loss of £351m and set aside £3.2bn for bad loans.
Barclays saying something similar:
Maybe Monzo not doing those loans wasn’t a bad move after all!
Weren’t there the government back ones starling did? Is there a downside to those, from a starling point of view
All those articles in the national newspapers admonishing Monzo for not making loans right in the middle of a pandemic and before a gouging recession. I mean, do they think Monzo’s stupid?
I believe a member of staff posted in another thread that Starling may have to start accounting for potential losses on loans in a similar way to Barclays & Natwest have after the first year. So we may see Starling impacted greatly too …
But aren’t they backed by the government if they default?
Not all the losses are attributed to this as there will likely be higher than normal default rates due to the condition of the economy. Further, they haven’t physically lost the money yet. its just set aside to cover what they think may happen. Could end up with less defaults than expected (or more).
Natwest’s loss is less than the market expected and it’s good news that they are resuming dividend payments. As a shareholder, I am perfectly happy and relaxed about the situation.
I think that was me… This isn’t quite right. It’s quite complicated accounting but i’ll do my best to explain.
Usually when a bank books a loan for eg. £1,000, at 12% APR, the day the loan is taken out we have to record a loss on our balance sheet for the amount we expect to lose in the first year - so if this was 3% it would mean the day we booked the loan we loss £30 (we also have to hold additional capital but we’ll ignore this as that’s even more complicated!).
This realllyyyy hurts companies (like Monzo) who are trying to scale their loan book quickly because say we grow our loan book by £10 mil in one month. Using our example earlier in this one month we’d generate:
- 3% * 10 mil = £300k in losses
- 12% * 10 mil / 12 (months in the year) = £100k in revenue
So although we just booked £10 mil in loans (which sounds great) we just lost £200k.
The bounce back scheme loans Starling do are backed by the government so they don’t have to do this and the credit losses on these loans for Starling will be £0. However, they’ll still have to cover the operational cost of collecting on these loans (which given 50% are expected to default might be quite high), and the bounce back scheme loans are coming to an end on 31st March 2021.
Once this happens my guess is Starling will want to grow their own lending book which will then put them in a similar situation to what i explained above where they’re booking lots of loans but as a result generating a loss each month!
Yes and no.
The government is the ultimate guarantor of the debt, so will pay back Starling if they cannot recover the money (this is what being “government backed” means).
However, the cost of chasing up the loan and attempting to collect the debt is down to Starling. This means that, in reality, Starling may still have to incur significant costs associated with defaulted or delinquent loans, as the government only pays up after this process is fully-exhausted.
Appreciate the response @TheoGibson
Accurate but naive. If you can’t put up the capital, get out of the game
True, unless the date is extended in next month’s budget.
However, even then Starling can collect interest on the performing BBL loans for 10 years which are low risk given they are ultimately backed by HMG.
Starling would have needed to scale up it’s collections activity anyway in order to book more of their own loans - this just gives them an income stream to do so.
It’s probably why all the other banks were also happy to offer them (and many will have large collections teams already).
The impression I got is that Monzo just didn’t have enough Capital to lend and couldn’t raise more - not a good position for a bank - unlike Starling (and Metro?) who tapped their funders…