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.
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UK is currently experiencing a crisis with the uncertainty of the Greek credit. Although RBS has a decrease in bad debts, it has a net loss of £248 billion. That number is likely due to large investments, an increase in loan/mortgage approvals, or the last economic recession. Next, I agree with Jackie. There was a reduction in bad debts for the fiscal period; however, we cannot be sure if this is because less people are defaulting on their loans, or if people are simply making the minimum payments to get by. With the UK economy at a down, banks will likely decrease their interest rates to attract customers. However, it will be harder to gain a loan, and banks will need to grant more loans to earn the same amount of revenue, or gain a greater market share. People with loans may default on their loans if the economy continues to worsen, and there may be a small “US economic recession” in the UK. Banks are facing enough challenges without the Greek political election to complicate things.
ReplyDeleteAlthoguh the EU is in a great debt crisis at the moment, i think there is stil hope. If they manage to balance out the interest rates with the banks and do something with the countries GDP, they may be able to recover slowly. The massive bailout of trillions of dollars definately helped with the companies because they are simply "too big to fail". I think that if companies and corporations were more responsible and less risky with thier debts and loans, they would contribute less of the reason for putting the government in such a financial position.
ReplyDeleteBad debt is something that no one wants in their everyday life, their company, and certainly not in their country. While the Royal Bank of Scotland falls in a bad debt situaion, the government bailed them out in 2008 in hopes to help them move on from this poor situation. I agree with Matthew that companies and corporations should be more responsible and less risky with their debts and loans, they would contribute less to the government burden. The money used by the governement to help the poorly conducted corporations out comes from the tax money paid by the citizens. With a large amount of money spent on the bailout, I predict there will be an increase in tax in the future.
ReplyDeleteIt is great to see a banking corporation like RBS stating excellent financial reports. Although the net loss of £248B shadows the success of reducing their bad debt expense by 14%, it will just be a matter of time before RBS and other banks start posting positive numbers back on their statements. As the article stated, people now have more wealth to pay off mortgages and other debts, and that means people are willing to spend. Back in 2008, the financial crisis started with the stock market crashing, making people all over the world conscious about their spending. That created a domino effect as people wouldn't spend and businesses wouldn't earn money, causing many of them to go bankrupt. Signs of a full recovery are finnaly showing.
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