Coronavirus could wipe out US bank profits, says S&P

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 the rating agency S&P Global Ratings warned.

The agency’s report on the effects of falling interest rates and soaring customer defaults described the worst-case scenario that would represent a dramatic reversal of fortune for a $ 195 billion industry Last year.

“The fluidity and uncertainty of the current situation makes it difficult to predict the level of stress to which banks will be subject,” wrote S&P analysts, the day when the number of coronavirus cases in the United States reached 64,000, the highest in the world after China and Italy.

Investors in the stock market have already ruled on the plight of US banks in the coronavirus crisis, dropping the KBW Banks index by 36% last month, while the S&P 500 fell 26%.

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The sharp drop in bank share prices reflects fears of an escalation in loan losses that could result from massive defaults by individuals who lose their jobs and by businesses forced to close during the pandemic.

Investors are also concerned about the effect of emergency cuts in Federal Reserve interest rates on bank profits as banks make better lines of credit when rates are high.

S&P said the double jeopardy “would lead to a substantial drop in bank profits and potentially much worse asset quality, especially in sectors more affected by the virus epidemic”.

The severity of the attack on bank profits would depend on the extent of the spread of the coronavirus, the duration of the economic downturn, the effectiveness of the federal government’s stimulus package and unemployment levels after the crisis.

In a very unfavorable scenario, with loan losses extending far beyond the currently struggling sectors and the US consumer affected “more significantly”, S&P calculated that the banks would collectively lose $ 15 billion in the year from the second quarter of 2020. It would be their first defeat since 2009.

In a more benign scenario, annual revenues would drop to $ 100 billion, according to the report. “The fluidity and uncertainty of the current situation makes it difficult to predict the level of stress that the banks will face,” said analysts.

Neither scenario includes the forbearance effect, where people are informed that they can suspend loan payments. Some banks have already announced payment and interest holidays. Forbearance means banks immediately lose interest income and can also result in loan reclassification under regulatory guidelines, triggering a financial crisis, although regulators have hinted that they will support working banks with their customers.

The scenarios also do not include the effect of new accounting measures that “could potentially accelerate” loan losses.

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