The coronavirus crisis could wipe out a full year of US banking profits and push the sector into the red for the first time in more than a decade, analysts at rating agency S&P Global Ratings warned.
The agency report on the effects of plunging interest rates and soaring customer defaults painted a worst-case scenario that would represent a dramatic reversal of fortune for a sector that made $195bn last year.
“The fluidity and uncertainty of the current situation make it difficult to predict what level of stress the banks will be under,” S&P’s analysts wrote, on the day the number of US coronavirus cases climbed to 64,000, the highest in the world after China and Italy.
Stock market investors have already given their verdict on how America’s banks will fare in the coronavirus crisis, sending the KBW Banks index down 36 per cent in the past month, as the S&P 500 tumbled 26 per cent.
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The sharp fall in bank share prices reflects fears of escalating loan losses that could stem from mass defaults by individuals who lose their jobs and companies forced to shutter during the pandemic.
Investors are also concerned about the effect of the Federal Reserve’s emergency interest rate cuts on banks’ profits, since banks make better lending margins when rates are high.
S&P said the twin perils would “lead to substantially lower bank earnings and potentially significantly worse asset quality, particularly in industries more affected by the virus outbreak”.
The severity of the hit to banks’ profits would depend on how widely coronavirus spreads, how long the economy is locked down, the effectiveness of the federal government’s planned stimulus package and unemployment levels after the crisis.
In a severely adverse scenario, with loan losses spreading far beyond the sectors currently under stress and the US consumer affected “in a more meaningful way”, S&P calculated the banks would collectively lose $15bn in the year starting from the second quarter of 2020. That would be their first loss since 2009.
In a more benign scenario, annual earnings would fall to $100bn, according to the report. “The fluidity and uncertainty of the current situation make it difficult to predict what level of stress the banks will be under,” the analysts said.
Neither scenario includes the effect of forbearance, where people are told they can suspend loan payments. Some banks have already announced payment and interest holidays. Forbearance means banks lose interest income immediately, and can also lead to loans being reclassified under regulatory guidelines, triggering a financial hit, although regulators have hinted they will support banks who work with their clients.
The scenarios also do not include the effect of new accounting measures which “could possibly accelerate” loan losses.