Memorandum submitted by Clydesdale Bank
PLC
In advance of the Committee hearing on 2 June,
I would like to provide an update on how Clydesdale Bank PLC (which
incorporates both Clydesdale and Yorkshire Bank brands) continues
to support its business customers in what remains a difficult
and uncertain economic climate.
Demonstrating our consistent support for business
customers, Clydesdale Bank has advanced £1.9 billion in new
lending in the six months to 31 March this year, of which £1.2
billion was new business lending.
As I outlined in December, the Bank has always
been a prudent and responsible lender. Despite the current economic
difficulties, the ratio of 90 days past due balances to gross
loans and acceptances for our entire lending book remains comparatively
low at 0.71%. Indeed, gross impaired assets as a percentage of
gross loans and acceptances compares favourably with UK peers
(1.11% at 31 March 2009 compared with between 3.97% and 6.18%
for other UK banks, at 31 December 2008).
Helping customers in this challenging environment
continues to be a key focus for Clydesdale Bank. As I explained
in December, our devolved business model was created to ensure
that our experienced bankers can act as trusted partners to customers
in the communities in which they operate. A key focus for them
has been the tailored advice and support they can give to customers
when they encounter difficulties.
The Enterprise Finance Guarantee (EFG) has been
a useful tool to support our business customers. In particular,
this funding helps businesses put their borrowing on a more structured
footing. This allows them to free up working capital, enabling
them to continue to function in the current economic climate.
We continue to actively promote the EFG to customers and whilst
we have a 3% share of the UK business lending market, we have
submitted over 10% of the entire industry's eligibility checks
by volume and 25% by application value. As you will be aware each
Bank has been allocated an annual lending cap for the EFG. While
the guarantee has been in place for just over four months, we
have already approved loans worth 57% of our annual lending cap.
Please find attached more information on the
Bank and the activities we have undertaken to support our business
customers. I have also attached more information on the Bank's
Half Year results.
1. ECONOMIC OUTLOOK
1.1 Recent figures have shown that the economic
contraction has been larger than originally forecast. House prices
have fallen by over 20%, although there have been significant
regional and sector variances. Similarly, commercial property
has fallen by 40% from its peak. Manufacturing output has also
fallen while unemployment continues to grow.
1.2 Nonetheless, there are a number of key differences
to the most recent recessions during the 1980s and 1990s. First
of all, at 0.5%, interest rates are at their lowest level since
1694. In the 1990s it was not uncommon for someone in a perfectly
good job to be unable to service their mortgage as interest rates
rose rapidly. Now, low interest rates underpin the affordability
of debt and therefore if someone stays in employment there is
no reason why they will not be able to service their loans. While
unemployment continues to grow, the impact of this is partially
offset by the growth of dual income families. This has been shown
to help mitigate the loss of an individual's job for a household.
1.3 Sterling has also depreciated significantly
against other major currencies and UK exports have become more
competitive in foreign markets. There have also been significant
falls in energy prices which has enhanced the purchasing power
of households and SME's.
1.4 Perhaps the biggest difference to the
recessions experienced in the 1980s and 1990s is the scale of
the fiscal stimulus package in the UK. Alongside this is the extent
of the internationally coordinated (and early) intervention and
consensus of approach from governments worldwide, which was noticeable
by its absence in the 1990s.
1.5 There has been widespread commentary
on whether we are seeing the first "green shoots of recovery".
However, as recently indicated by the Governor of the Bank of
England, caution is required in reading too much into the recent
positive indicators. The economy remains in a fragile position.
Unemployment, at 2.2 million, is expected to continue to grow
for a number of months to come. Consensus forecasts suggest that
while the UK economy may enter growth towards the end of the 2009,
the actual rate of this growth is uncertain and is likely to remain
weak throughout 2010.
2. UPDATE ON
CLYDESDALE BANK
PLC
2.1 Clydesdale Bank PLC (which incorporates
both Clydesdale and Yorkshire Bank brands) has an enduring commitment
to supporting its business customers in these challenging times.
The Bank's strategy remains unchanged and it has advanced over
£1.2 billion of new business lending in the six months to
March this year.
2.2 Clydesdale Bank continues to maintain a very
conservative liquidity and capital position. While this has had
an inevitable effect on bank profit, the compelling security and
strength of the Bank has attracted deposits at five times the
industry average over the last year. As outlined in December,
our aim is to ensure that deposits raised locally are reinvested
locally.
2.3 Clydesdale Bank continues to be ahead
of its peers on most key indicators with a strong underlying business
that remains profitable, despite the impact of the trading environment
all UK banks operate in. The Bank remains in good shape and is
well positioned to support its business customers.
3. SUPPORTING
BUSINESSES
3.1 A key element of Clydesdale Bank's business
model (and its growth in recent years) has been the holistic advice
and support the Bank is able to give its customers. In this regard,
the Bank can tailor the most appropriate funding for its customers.
For some this may be a simple debt facility. For many others,
it will be a more sophisticated mix of invoice and asset financing,
hedging and currency loans for importers and exporters.
3.2 As outlined in December's submission, Clydesdale
Bank's devolved business model was created to ensure that its
experienced bankers can act as a trusted partner to customers.
As such they are able to give advice to customers and are on hand
to support them when they encounter difficulties.
3.3 Each of the Bank's Financial Solutions
Centres has a regular programme of seminars and events that cover
a variety of topics, such as budget briefings and regional development
discussions. In the last year many of these seminars have focussed
on how customers can survive (and indeed thrive) in the current
climate.
3.4 Reflecting the changing conditions,
the Bank has developed various products and programmes to help
customers. For example, the Bank has tailored support packages
for companies involved in property development. As well as continued
financial backing, this includes extensive marketing support and
sharing of best practice in terms of prospecting and follow-up
of sales opportunities.
3.5 In December Clydesdale Bank outlined
the successful work of its "intensive care" unit for
companies in distress. This unit has a strong track record in
assisting customers. In order to continue the dedicated and high
level of support given to customers, the number of people in this
division has more than doubled in the last year.
4. ENTERPRISE
FINANCE GUARANTEE
Background
4.1 The Government's Enterprise Finance
Guarantee (EFG) was launched on 14 January 2009 as part its programme
to help the cash flow, credit and capital needs of small to medium
sized businesses. Clydesdale Bank was one of the first banks to
offer EFG when it was launched. This reflects the Bank's ongoing
relationship with Capital for Enterprise Ltd (CfEL) who administer
the initiative on behalf of BERR, and the Bank's long standing
association with the Small Firms Loan Guarantee which it replaced
(and where Clydesdale Bank was one of the top six lenders in the
scheme).
4.2 With total business lending of £18.4
billion, the Bank's share of the EFG (currently c £39 million)
is relatively small. However, it is an important component of
the products on offer to business customers.
The launch of EFG
4.3 It was anticipated that there would be an
initial bedding in period of the scheme, as both customers and
local business advisors became familiar with the amended eligibility
criteria to the previously available Small Firms Loan Guarantee
(SFLG). However, the strong level of media interest in the scheme
and the work conducted by Clydesdale Bank to promote the initiative
to its customer base has ensured that interest and usage of EFG
among the Bank's customers has been strong.
4.4 Clydesdale Bank has worked extensively to
ensure that all of its Relationship Managers are aware of the
EFG and understand how it can benefit customers. As well as regular
updates, the Bank has held a number of local workshops (attended
by senior and relationship managers, along with their local credit
partners). Additional information is available via the Bank's
"intranet" and "team rooms" with named contact
points within the Bank for anyone seeking further assistance.
4.5 Clydesdale Bank has also sought to promote
awareness of the Government initiative through external advertising,
information on the Bank's website and information packs for its
customers and professional partners.
EFG utilisation
4.6 Clydesdale Bank's Relationship Managers
have been pro-active in identifying customers that may benefit
from the scheme. Understanding whether a customer is potentially
eligible for the EFG is an easy and straightforward process through
the CfEL's portal. Managers are encouraged to consider as many
customers as possible.
4.7 According to the latest figures published
by CfEL, Clydesdale Bank has submitted over 10% of the entire
industry eligibility checks by volume and 25% by application value.
Each Bank has also been allocated an annual lending cap. While
the EFG has been in place for just over four months, Clydesdale
Bank has already approved loans worth 57% of its annual lending
cap. Given this utilisation and overall success Clydesdale Bank
is in discussions with CfEL on increasing its lending cap.
4.8 Once it has been has confirmed that
a customer is eligible for the EFG, the process is essentially
the same (from a customer's perspective) as the Bank's normal
loan application process. There is no additional administrative
burden for the customer.
4.9 There has been discussion on whether
the current criteria for the EFG should be adjusted, particularly
in regard to the £25 million threshold limit. To date this
limit has not proved a barrier to the Bank's ability to lend to
customers, although it is something that should be kept under
review.
5. SUPPORT MECHANISMS
FOR BUSINESSES
5.1 Loan guarantee initiatives, such as
that offered by the EFG, are useful mechanisms to support business
customers and this continues to be the case during the economic
difficulties.
5.2 In most cases, Clydesdale Bank's customers
have utilised the EFG for the consolidation of the hard core element
of overdrafts into term loans. This funding enables businesses
to put their borrowing on more structured footing. In turn, this
enables them to free up their working capital to allow them to
continue to operate in the current climate. The EFG has also been
used to support businesses whose debt would otherwise have been
called up as a result of deterioration in the value of the security
held.
6. DISCUSSIONS
WITH GOVERNMENT
6.1 Clydesdale Bank is represented on the
Government's Small Business Finance Forum. This initially met
monthly but now meets on a quarterly basis. This has been a constructive
forum for the banks and other interested parties to discuss with
the Government the issues currently facing SMEs. Suggestions considered
include a provision of local coaches/facilitators similar to the
Welsh model, who could help new businesses become bank ready with
their business plans.
6.2 The Bank is also involved in discussions
with the Government through its membership of the British Bankers'
Association.
27 May 2009
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