Some sectors of the economy will never return to pre-COVID levels, the chief executive of Britain’s fastest growing bank has said.
“There’s segments where the new normal will have real scarring, and by scarring eventually they won’t return, in our view, to 2019 levels,” Rishi Khosla, the chief executive of OakNorth, told Yahoo Finance UK in an interview last week.
Khosla said High Street retail was a “perfect example” of a sector that will never return to normal.
“In our estimation, for each percentage increase in online sales, you lose about 1.5-1.7% of retail square footage physical,” he said.
“If you play that through, if you’re talking about a 10% increase in online sales in the new normal — clearly at the moment it’s higher — then you’re looking at anywhere between 15-17% reduction in retail sales square footage and I would say that would disproportionately hit High Streets.”
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Khosla’s prediction was based on detailed modelling of the UK economy done by OakNorth. The bank has split the economy into 133 sub-sectors and began running COVID-19 stress tests on its loan book in January.
“We think that ultimately there’s pain ahead of us,” Khosla said. “We think that a number of sectors are going to be affected, we think a number of sectors will take till 2022, 2023 to get back to their normal levels.
“But within that you have some Vs, you have some Ls, you have some Ks — whatever,” he added, referencing the various shapes of recovery in output when charted.
Aside from COVID-19, it looks increasingly likely that businesses will also have to deal with Brexit disruption in the New Year. Khosla said the rising possibility of a no deal Brexit was “not very helpful”.
“I think that minimising disruption for businesses is probably not a bad thing to do,” he said. “The government has to fix the logistical issues to make sure there aren’t issues at the ports.”
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The Financial Times has reported that the government plans to recruit as many as 50,000 people to fill in customs forms as part of new Brexit trade arrangements. Khosla said this could slow the UK’s recovery, given the lack of economic benefit of this type of work.
“We’ve been battling low productivity and we’re going to hire 50,000 people or whatever the number is to do administration at ports,” he said. “It’s like a throwback to the 1800s. That concerns me.”
However, Khosla said he would “shocked if we don’t end up in a better place than is being speculated at the moment” on Brexit.
Khosla cofounded OakNorth in 2013 as a tech-centred bank focused on helping entrepreneurs and growth businesses with funding. The company has lent £4.5bn ($5.8bn) to UK businesses to date. As well as lending directly, the company also provides loan assessment technology to banks around the world.
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OakNorth was named Europe’s fastest growing company by the Financial Times in March this year. Khosla said growth has only accelerated since then, even as other banks are pulling back from most corporate lending that isn’t under government support schemes.
“Clearly, there are parts of the economy that have been doing well,” he said. “As a function of that, here in the UK our lending volumes have, especially since June, been about two times what they were the same period last year. Over the last two weeks, we’re closer to four times the volumes we were last year.”
Loan approvals have been averaging £150m per month since March, a spokesperson confirmed.
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OakNorth’s reliance on sophisticated technology to asses loans has led to an almost unheard of default rate compared with the rest of the banking industry. Just seven loans written by the company have defaulted to date and the bank hasn’t incurred any credit losses.
Khosla said OakNorth had taken a small provision to cover an expected rise in losses due to COVID-19 but said the sum was not significant.
“Do we think as a function of COVID we’ll end up with a few more defaults and maybe some credit losses which otherwise we wouldn’t have had? Yes,” Khosla said. “Do I think it’s going to be material? No. Do I think it’s going to be anywhere near the other institutions? No.”