OakNorth’s head of debt finance: Challenger banks use agility to thrive

Banks might be slashing profits because they aren’t agile enough, says Ben Barbanel, head of debt finance at OakNorth Bank

By Tom Lemmon | 7 May 2020

Incumbent banks have slashed profits to prepare for corporate defaults because they aren’t flexible and agile enough to manage their books with confidence, according to Barbanel.

An article by the Financial Times estimated that banks had built a cumulative total of $50bn in reserves to cover coronavirus-related losses, with HSBC funnelling $3bn in preparation for the bad loans.  

“In many of the larger institutions, they wouldn’t have yet bottomed out what they have in their portfolios. The challenge is understanding what is in your book and where those businesses are,” Barbanel says.

Due to their size and length of communication lines, Barbanel argues that incumbent banks simply don’t have the ability to analyse their customers in the way digital-first challenger banks can, which is why reserves are being built while profits are cut.

“We're looking at every single case on the book. We know every borrower’s cash position. We know their plan to emerge. We know their forecasts.

“On the other side, we overlay that on our own views, our own sensitivities and our own stress cases. And I just know that in the larger organisations, they won't have that level of data available to them to take a considered view across the portfolio,” says Barbanel.

After the crash in 2008, financial regulators moved to ensure that capital requirements would sustain banks through severe market shocks. From the Basel accords to regional and national requirements, Barbanel believes the industry is in good order.

“Banks are better capitalised now and there isn't that liquidity crunch. We're certainly not seeing any liquidity crunch on the positive side of the book, to cause to cause further issues. This is external influences rather than 2008 which was almost inside banks.

Challenger banks in the UK have seen significant drops in new customers, with research by Finbold showing a collective slide in the number of new downloads down by 23.38 percent at the end of March compared to February. But that doesn’t mean they’ve stopped lending.

Far from a time to start pulling back and building reserves, Barbanel instead sees the current crisis as a moment to expand.

“We see it as an opportunity to increase our loan book by doing deals that perhaps would have been the demise of the more risk averse type lenders. And therefore, we believe that we'll do some deals that wouldn't have historically come to our door because our pricing is typically higher.

“We have probably had about £50m of new to bank credit approvals in the last few weeks, excluding all of the CBlLS schemes that we're in as well. So, we still believe there are opportunities there. We still believe that entrepreneurs find a way in times of turmoil,” Barbanel says.

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