Alison Rose, CEO of NatWest Group PLC, warned that it would not be until the final quarter that a clear picture on asset quality would emerge as the U.K. government's job furloughing scheme comes to an end.

Rose, speaking at S&P Global's Banking Horizons Europe 2020 virtual conference, said there would be further impairments for the group in the second half. This would be driven by a combination of the economic outlook and how effective government support schemes proved.

"It is still too early to say how asset quality is developing as a result of the pandemic. It may not be until fourth quarter that we start seeing event-based stage migration as the furlough scheme ends on Oct. 31," she said.

Under the U.K. government furlough scheme, employers pay 20% toward the salaries of staff who cannot work because of the pandemic with the government picking up the remaining 80%. This scheme comes to end on Oct. 31. Under the replacement Job Support Scheme, which will last six months from Nov. 1, the government will top-up salaries in companies that cannot take employees back full time. Staff must be in a "viable job" and will have to work a third of their normal hours instead of none while the government and employer will each pay one-third of their remaining wages.

Since the steep increase in the use of revolving credit facilities in March, commercial customers have made significant repayments as government lending schemes have kicked-in, said Rose, though more recently these have been slowing in terms of quantum. Current revolving credit facility usage is about 30%, which is down from the COVID-19 peak of 40% but still above pre-pandemic levels.

The banking group is seeing continued growth in lending due to the government lending schemes, but customer demand is slowing in terms of applications, she said.

Debit and credit card spending is growing at the group and in July it was 10% higher than the levels seen in June, with debit card spending back to the same levels as January.

Mortgage uplift

Around two-thirds of the group's U.K. customers who had asked for a mortgage repayment holiday have not opted for a further extension, said Rose, which she called an early positive development.

Rose said the U.K. mortgage market had seen a significant uplift, driven by pent-up demand and stamp-duty support from the government.

These elevated levels of activity might moderate, said Rose, as there was likely to be a tailing-off of demand along with the end of the certain government support schemes.

NatWest Group entered the pandemic with a capital position that was robust in relative and absolute terms, which could be crucial in the event of a second wave of the pandemic, she said.

The importance of 'S' in ESG

Rose also talked about the importance of environmental, social and governance, or ESG, factors in relation to the pandemic.

"If we think about risks in terms of ESG for banks, the focus has historically been on governance, but the pandemic has highlighted the importance of the 'S' in ways that were, perhaps, not previously expected either as a risk or as an opportunity," she said.

She said it has resulted in the bank taking a strategic shift from taking a compartmentalized view of customers to a life-cycle approach where the bank aimed to support them at all stages of their financial lives.

"Done well, the outcome is deeper relationships with our customers which becomes a foundation for future sustainable growth. The wide range of support measures put in place for customers over the last few months is an example of that mind-set and we are actively engaged in discussions with industry and government about the support needed as move into the next stage of the crisis as the initial forms of assistance are wound down," she said.

Operational resilience

The pandemic had accelerated the changes the bank had already introduced to provide greater flexibility to its workforce, said Rose.

"It is probably condensing a few years into a few months, driving us all to consider now what it means for how we will work in future and now the near future," she said.

Dealing with COVID-19 had boosted banks' digital capacity, she said, while ever-improving operational resilience is allowing for increased customer activity online.

The CEO said there would be more "hybrid" working, spending time in the office and elsewhere. Branches will increasingly become venues for customers to have deeper conversations with bank staff about their finances or undertake automated transactions.

Rose also said the U.K. banking sector was well-prepared for whatever outcome occurred following the end of the Brexit transition period.

On IFRS 9, Rose said it was designed to answer the challenge of the last financial crisis, allowing banks to book charges earlier. She said the quality of the bank's disclosures had improved as a result, but the complexity of IFRS 9, including the need to make forward-looking judgments, had proved to be a complicated process.

"Particularly in the pandemic environment where there is a huge amount of uncertainty, that is definitely a challenge...The acid test of IFRS 9 is whether we got it right or not — and it's too early to predict that," she said.

This report is based on a panel discussion at S&P Global's Banking Horizons Europe 2020 conference on Oct. 1, 2020. For more news and insights from the conference, click here.