Investors have given their verdict on how US banks will be impacted by the escalating coronavirus crisis, sending the benchmark KBW Bank index down 25 per cent in March, more than twice the wider market.
Here are five big things we know about how banks are being impacted, and five big unknowns.
What we don’t know
Are dividends at risk? The big US banks have already voluntarily suspended their multibillion-dollar buyback programmes. Now European regulators have urged their banks to pause all shareholder payouts, including dividends, and US bank investors are wondering if the same could happen in America. “That’s a question that comes up,” said Mike Mayo, analyst at Wells Fargo, who believes halting dividends would be a “horrendous mistake” since it would send the signal that banks were not strong enough to withstand the crisis without taking exceptional measures.
How long can banks offer forbearance? Banks are promising to work with customers on forbearance measures, like payment holidays, and to extend new loans to companies that need liquidity. If the coronavirus crisis goes on for a long time, and banks are faced with rising defaults, will banks have to change their approach to protect their own businesses?
Will the regulatory landscape shift? Banks and their regulators are very much on the same side now, with regulators softening their stance on everything from loan loss accounting (by delaying the introduction of tough new standards) to the size of the liquidity and capital buffers banks must hold. Will banks be able to hold on to some of regulators’ goodwill, and some of the relief they have been granted, after the crisis ends?
Can the banks get the stimulus money to the right people? Politicians have said the banks would play a big role in helping getting cash from the $2tn US stimulus package to the businesses and individuals that need it, and that they would be paid a fee for doing it. The mechanics of how that will work is still largely a mystery. Banks have a lot riding on it going well. Getting the money quickly into the hands that need it will be a critical step in stemming the economic crash (and banks’ resultant loan losses).
Will retail banking ever be the same again? One silver lining for banks from the coronavirus crisis is that it is forcing some customers to finally do their business online, either because their branches are shut or because the health risks of going outside are too high. As banks have closed thousands of branches temporarily, there’s a quiet debate over whether all those branches will need to reopen long term. The crisis is also turning people away from cash and towards digital payments, since digital doesn’t require any physical contact at the point of sale. If that trend persists, it could be positive for banks.
What we do know
Trading is booming. Banks could post an increase of as much as 30 per cent in their first quarter trading revenues thanks to coronavirus-related volatility, analysts and experts say. On March 11, Mark Mason, Citigroup finance chief, said that his bank was headed for an increase in the “mid single-digit [percentage] range”. Daniel Pinto, JPMorgan investment bank boss, made the same prediction for his bank a month earlier. The flipside is that M&A activity has fallen off a cliff, and IPOs have dried up, which will hurt the investment banking fees.
Lending volumes are soaring: Growing their loan books has long been a struggle for big US banks. No more. America’s banks grew their commercial loan books by $243bn last week — twice the amount they add to their loan books in a typical year, according to Federal Reserve data analysed by research house Autonomous. Senior executives at large US banks say their loan books are likely to grow further in the coming months as they extend credit to companies and individuals whose incomes have been depleted.
Margins are getting squeezed: The Fed’s successive emergency interest rate cuts will be good for banks overall if they succeed in stabilising the US economy, but in the short term they are bad news because they put more pressure on already-thin lending margins. Banks are expected to give more detail on the impact of this hit when JPMorgan Chase kicks off the first-quarter results season April 14.
Costs are going up: Banks have been spending what they need to keep their businesses running through the coronavirus pandemic but the costs are stacking up. Running a main office and a handful of disaster recovery sites means some costs are duplicated. Banks have been buying thousands of screens and other computer hardware to set up their employees at home. “We’re starting to think through these things,” said a senior executive at one large bank, adding that cost cuts would follow once the dust had settled.
Banks are playing nice with staff. Citigroup, Bank of America and Morgan Stanley have all told their staff that there will be no lay-offs in 2020 as a result of the coronavirus. Goldman Sachs has told its staff it had no plans for coronavirus-related lay-offs, but hasn’t specified a date, a spokesman told the Financial Times. Banks are also making cash payments to help staff with childcare.