Britain’s economy entered crisis mode in March last year and plotting a course toward recovery dominated the recent budget.
But there is reason for optimism, and the conclusion of the annual reporting cycles for the leading financial institutions in the UK and the US can tell us a lot about where we will see growth over the next year.
Banks on both sides of the Atlantic have outlined their provisions for loan defaults, and there is sense of the scale of the challenges for the year ahead.
On the surface at least, the US banks have fared better than their UK counterparts.
The majority have recognised a reduction in their allowance for loan losses in the last quarter of 2020, unlike the key UK institutions. And, unlike their British cousins, more large American banks reported much better earnings than expected.
Looking more deeply into the results, most US banks have sizeable investment bank arms which had done incredibly well and have been boosted by mergers and acquisitions and volatile capital and currency markets.
UK banks, on the other hand, are predominately retail and commercial. Therefore, they are more exposed to the immediate shock of the pandemic on consumers and businesses.
Meanwhile, wholesale banking in the UK pulled its punches while Brexit created a storm of uncertainty.
Profits for all the large banks fell. Some as far as 70 per cent, while others fared relatively better, with hits of 30 of per cent.
This might not inspire confidence in a strong recovery, but the true picture is much more nuanced and cautiously optimistic.
British banks have not revised down their expected buffers for loan losses, but the full year charges for credit losses were at the lower end of expectations provided in the interim updates at the half year.
Last week, Rishi Sunak confirmed the 80 per cent Government guarantees for emergency Covid-19 bank loans will continue. The tap will stay on for a little longer, but banks’ exposure will be limited.
Crucially, there is an end point.
The rollout of the vaccine has signalled a gradual end to social distancing restrictions, which was reflected in a buoyant outlook for economic growth from the Office for Budget Responsibility.
If accurate, it will be the fastest rate of growth in 50 years and should further help to limit the risk of loan defaults across retail and commercial banking. It could even see credit losses come in under forecast.
This earnings season revealed just how strong bank balance sheets have become in the years since the financial crisis.
All the large UK banks are now well capitalised, allowing them to withstand the greatest economic shock in centuries and maintain the capital needed to support businesses.
This is partly down to a regulatory regime that instils prudence and proactive risk management by the banks.
Considering the huge sums of credit banks have issued to businesses over the last 15 months, the fact that their balance sheet remains so robust is impressive – and will continue to remain so even in their worst-case scenarios for loan defaults.
The UK banking sector’s efforts, and those of the regulator since 2008, have ensured our financial infrastructure has been sufficient to withstand the pandemic – and is robust enough to help power the recovery.