S&P: Coronavirus Could Eliminate U.S. Banks' Profits
Banks in the U.S. could see their full-year profits wiped out, with the sector getting pushed into the red for the first time in more than a decade, analysts at rating agency S&P Global Ratings warned.
Plunging interest rates and soaring customer defaults could represent a dramatic reversal of fortune for a sector that made $195bn last year, as the rating agency presented a worst-case scenario.
«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 U.S. coronavirus cases climbed to 64,000, the highest in the world after China and Italy.
Sharp Fall In Share Prices
Bank share prices have fallen sharply, reflecting fears of mounting loan losses that could stem from mass defaults by individuals who lose their jobs and companies forced to wind down during the pandemic.
Investors are also worried that the Federal Reserve’s emergency interest rate cuts could crimp banks’ profits since banks make better lending margins when rates are high. S&P said that the twin perils would lead to much lower bank earnings and worsening asset quality, especially in industries more affected by the virus outbreak.
Worst-Case Scenario
How badly banks' profits could get hit would depend on the extent of the coronavirus reach, 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, S&P calculated the banks would collectively lose $15bn in the year starting from the second quarter of 2020, whereby loan losses spread far beyond the sectors currently under stress and the U.S. consumers get affected «in a more meaningful way». That would be their first loss since 2009.
More Benign Scenario
In a more benign scenario, the annual earnings of banks 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. While some banks have already announced payment and interest holidays, forbearance means banks lose interest income immediately.
This 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.
