Bad debt expenses

http://news.bbc.co.uk/2/hi/business/10101785.stm

Summary
On May 7th 2010, Royal Bank of Scotland announced they narrowed their losses of £765M to £248M after a significant 14% drop in bad debt expenses. Stephen Hester, Chief Executive of RBS, was pleased to see “Economic recovery is benefiting (our) customers and thereby ourselves (RBS)”. People now have more wealth to pay off mortgages or loans that were borrowed from RBS. Apart from decreasing in bad debt expenses, RBS posted operating revenue of £713 M comparing to £1.35B lost the last time. 84% of RBS’ equity is now owned by the taxpayers as a result of the massive government bailout in 2008 to prevent RBS from collapsing.

Connection
Bad debt expense that is associated with banks is not quite similar to bad debt expenses that regular companies would have. In a retail or wholesale business, goods and services are delivered in exchange of revenue. However, because the core operation of bank is loans and mortgages, generating revenue will mean they have to give up their cash in exchange of interest revenue that is going to be earned from the customers. The estimation of bad debt expense for RBS will be the combination of principal lent and interest receivables. A £0.2B decrease in RBS bad debt expense signaled people now have more wealth to pay off their debts, yet perhaps only minimal payments are paid to avoid penalties as economic conditions remain harsh because of the possible outbreak of Greece credit defaults.

Reflection
RBS reported net loss of £248B, despite a 14% drop in their bad debt expenses. As economic condition is slowly recovering, RBS should be optimistic that will continue to receive more payment from their customers. However, because of uncertainty of Greece debt crisis and political election process, outlook for United Kingdom in 2010 remained challenging. As a result of challenging outlook, I predict the interest rate in UK will remain low and in order to generate more revenue, RBS should start considering offering lower interest rate in the bank industry to acquire more market shares. By offering lower interest rate, owners’ mortgage or loans that fluctuate with interest rate will benefit from reducing interest rate and therefore more likely to pay off their debt as soon as possible. Reducing bad debt expenses and increasing revenue will then enlarge banks’ profit margin.