Banks are facing huge credit losses as their customers suffer through the coronavirus pandemic, S&P warns

Banks are facing huge credit losses as their customers suffer through the coronavirus pandemic, S&P warns

6 May    Finance News

S&P Global Ratings revised its outlook on the ratings of 13 U.S. banks to negative from stable and said the coronavirus pandemic will hit hardest those lenders that are most exposed to industries such as commercial real estate and consumer lending that are already being slammed by virus-driven stress.

Even with the unprecedented measures being taken by the federal government and Federal Reserve, bank asset quality, net interest margins and earnings are coming under massive pressure and banks are facing credit losses and capital declines if the crisis lasts a long time and the recovery isn’t strong enough, S&P credit analysts wrote in a note.

“The COVID-19 pandemic and the associated sharp contraction in the U.S. economy have abruptly ended a long period of good fortune for U.S. banks and created their greatest challenge since the 2008-2009 financial crisis,” said the note. “The widespread halting of much business activity and the surge in unemployment is weighing on their revenue streams and earnings, weakening the creditworthiness of their borrowers, and forcing them to sharply increase the allowances they set aside for future losses on their loans.”

S&P economists are expecting U.S. GDP to shrink at a 35% annualized rate in the second quarter and to contract by 5.2% for all of 2020. That is expected to be followed by a gradual recovery that will bring the economy back to prerecession levels in the third quarter of 2021. Economists are expecting unemployment to peak at 19% in May and end 2020 at 8.8%, before falling to 6.7% in 2021.

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Banks have come into this crisis in better shape than they were in 2008, after they were forced to boost capital and liquidity levels, said the note. But banks that aren’t well diversified in loan portfolios or business lines could be especially challenged if conditions in the areas they are most concentrated in were to deteriorate badly, S&P analysts wrote.

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The nation’s eight biggest banks are best positioned during the crisis because of their greater diversification, said the note. These include the eight institutions deemed to be systemically important financial institutions, the likes of J.P. Morgan Chase & Co. US:JPM and Goldman Sachs Group Inc. US:GS, along with other U.S. banks that are under enhanced supervision.

“We believe the stricter regulations and supervision they operate under, the various measures they have taken to boost their creditworthiness since the financial crisis, and their often superior business and loan diversification give them protections that more concentrated banks do not have,” said S&P.

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However, the situation remains fluid and if the economy were to contract more than currently projected, S&P may take ratings actions.

S&P’s outlook revision applies to Ally Financial Inc. US:ALLY, Capital One Financial Corp US:COF, Discover Financial Services US:DFS, Synchrony Financial US:SYF, SLM Corp. US:SLM, American Savings Bank FSB, CIT Group Inc. US:CIT, East West Bancorp Inc. US:EWBC, Investors Bancorp Inc. US:ISBC, New York Community Bancorp Inc. US:NYCB, Synovus Financial Corp. US:SNV, Trustmark Corp. US:TRMK, and Valley National Bancorp. DE:VNB

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The agency affirmed ratings and maintained a stable outlook on American Express Co. US:AXP, while affirming ratings and maintaining a negative outlook on UMB Financial Corp. US:UMBF. S&P also revised the trend on its economic risk score to negative. That metric is an input to its Banking Industry Country Risk Assessment (BICRA) and an important input to bank ratings.

Banks have been taking measures to protect themselves from the worst of the crisis, increasing loan loss provisions, extending deferrals and making other accommodations to its borrowers. In the first quarter, the big banks posted profits even as they boosted reserves by billions of dollars. But the crisis didn’t really begin to hit until mid-March, giving lenders a cushion in the first few months of the year when activity was still at normal levels.

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“Whether borrowers are ultimately able to meet the terms of the loans once the period of accommodation ends will depend on the duration of the pandemic and how quickly the economy rebounds,’ said the note.

For now, S&P’s economic risk score for U.S. banks is a 3, but it could be revised to 4 if the economic rebound is more subdued than currently expected. That wouldn’t lead to immediate ratings downgrades, but a worsening from there would negatively affect its proprietary risk-adjusted capital ratio measure, said the note.

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