By Scott Wright

THE chairman of Royal Bank of Scotland has warned that it is “inevitable” bad-debt charges will rise because of the blow dealt to the economy by the coronavirus pandemic.

Sir Howard Davies said in a virtual event for shareholders yesterday afternoon that all major banks will face higher impairments if the economy slips into recession and businesses fail.

He highlighted the scale of the challenge facing businesses in the hospitality, tourism and travel sectors, where the “changed long-term circumstances after Covid-19” may mean some will not survive.

The warning comes in a week which has seen rival banks HSBC, Santander and Barclays all make hefty provisions for bad debts rising this year due to the impact of the pandemic on business and the economy.

Royal Bank, which received a £45.5 billion bailout from taxpayers during the global financial crisis of 2008 and 2009, is expected to detail how it is providing for the “unprecedented” crisis when it unveils its results for the first quarter tomorrow (Friday).

Responding to a pre-submitted shareholder question, Sir Howard said: “It is obvious that if the economy goes into recession this year, which is highly likely, that there will be, for all banks, increased impairments.

“You will have seen that already this week, HSBC, Santander and Barclays have come out with results and have acknowledged they will be facing significantly higher loan impairments than before.

“That is an inevitable part of recession. There has never been a recession in the UK which did not involve some businesses going bankrupt, and therefore some loan impairments for the banks.”

Sir Howard and chief executive Alison Rose both delivered speeches and responded to questions submitted by shareholders in advance following the bank’s annual meeting, which took place with a minimum quorum at its Gogarburn headquarters. Shareholders were not permitted to attend because of social distancing measures.

Sir Howard and Ms Rose were quizzed on the bank’s decision to suspend its final and special dividends for 2019 following a request from the Prudential Regulation Authority to help protect banks’ capital positions during the crisis. Asked when investors could expect those dividends to be paid, Sir Howard said the position would not be reviewed until the end of the year, when the bank was better able to assess the impact of Covid-19 on the economy and impairments.

When asked how secure the banking system currently is, he declared that British banks, including, Royal, were in a stronger position than they had been at the time of the financial crisis. He noted that Royal had “comfortably passed” the Bank of England’s most recent stress test, which simulated the effects of sharp falls in GDP, house prices and share prices.

However, he acknowledged that at this stage it was not known how severe the current economic crisis will be or how long lockdown will last.

One shareholder asked if the bank would consider cutting jobs to limit the risk from Covid-19. Sir Howard responded by saying that the bank is “not envisaging a large redundancy programme” at this time. He said the bank has pledged to retain all existing staff this year, and remains “pretty busy”, with 90 per cent of its branches remaining open during the lockdown. He reported that demand for its business lending and mortgage services had risen sharply.

But he noted that, with huge numbers of staff now working at home, there could be implications for its “property utilisation” in the long term.

Ms Rose had earlier told shareholders that Royal Bank was “doing more than any other bank” to deliver government schemes to support people and businesses through the crisis. She said that the bank has so far approved around 7,400 loans with a value of about £1.4bn under the Coronavirus Business Interruption Loan Scheme.

The bank announced previously that both Ms Rose and Sir Howard will forgo 25 per cent of their fixed salary for the remainder of 2020, with the money being donated to the National Emergencies Trust Coronavirus Appeal. Ms Rose also requested that she is not considered for any variable pay this year.

Asked to comment on the bank’s decision to change its parent company name to NatWest Group from Royal Bank of Scotland, Ms Rose said it was the right thing to do as the bank moves into a “new era”. She reiterated that 80% of customers already do business with the bank under the NatWest name. Sir Howard said the bank will not be “moving people out of Scotland as a result of this decision.

“Nor are there any planned changes to the location of our registered headquarters in Edinburgh.”

All resolutions at the AGM were passed.Shares closed up 5.4p, or 4.7%, at 120.45p.