By Peter Rudegeair
Add together some of the biggest challenges U.S. banks weathered
in the dozen years since the financial crisis, and you get an idea
of how bad the coronavirus epidemic could be for them.
A decade ago, banks persevered through a recession and
widespread loan defaults. Until 2015, they endured years of
ultralow interest rates and slow loan growth that pressured their
profitability. In 2015 and 2018, banks survived selloffs in the
stock market. In 2016, the industry came through a collapse in
energy prices with a few bruises, but no big busts.
Now, banks face all those threats simultaneously. Many of their
businesses mirror economic activity, so falling growth and rising
unemployment can dent their profits. Sharp drops in asset prices
can sap their investment-banking and trading revenues as deal
activity and investors pause.
Banks entered the year better capitalized and less reliant on
flighty, short-term funding than they were on the eve of the
financial crisis. But their earnings likely will suffer.
Here is a look at how banks could fare in a coronavirus-related
slowdown:
Lower Lending Revenue
Around two-thirds of banks' revenue last year came from interest
earned on loans and securities, according to data from the Federal
Deposit Insurance Corp. The rates banks charge on some large
categories of loans, including commercial and industrial lending
and credit-card balances, are tied to benchmarks that have fallen
in recent weeks. That threatens to crimp banks' net interest
income.
For instance, a reduction of 1 percentage point in both short-
and long-term interest rates translates to $6.54 billion in lost
interest income in 2020 for Bank of America Corp., or roughly 7% of
its annual revenue, according to estimates from Credit Suisse Group
AG. Bank of America is an outlier, but the average big U.S. bank
will face a 2% hit to revenue from a drop in interest rates of that
magnitude, according to Credit Suisse.
Falling Loan Growth
Banks might also struggle to make up on loan volume what they
are giving up in terms of loan yields. Throughout 2019, businesses
and consumers showed a willingness to borrow, and loan balances at
all U.S. banks at the end of the year were up 3.6% from their
levels at the end of 2018, according to FDIC data.
More recently, fears of the coronavirus weighed on businesses'
decisions to invest and expand, especially in sectors such as
travel and hospitality and in industries that depend on global
supply chains. Commercial and industrial loans increased by less
than 1.5% each week in February compared with the same period last
year, according to data from the Federal Reserve. In February 2019,
commercial and industrial growth exceeded 10% each week.
Consumers have borrowed from banks at a higher pace than
corporations have since the start of the year, but have started to
flag in recent weeks. Since late January, banks' consumer-loan
growth has plateaued at just under 6%, according to Fed data.
Consumer Crunch
The prospect of scores of consumers missing work and forfeiting
paychecks also bodes poorly for many of the loans banks already
have on their books. Delinquencies and defaults on mortgages, auto
loans, credit cards and other forms of consumer borrowing tend to
rise and fall with the unemployment rate, and any prolonged period
of joblessness likely will mean that borrowers fall behind on their
loan payments.
Banks have been more conservative in extending credit to
consumers since the financial crisis, and the industrywide
loan-loss rate is well below its long-term averages and just 0.18
percentage point above its record low in 2006, according to
analysts at Barclays PLC. But things can worsen quickly: Banks have
been reducing the reserves they have set aside to cover potential
defaults in recent quarters, even as defaults on certain loan
categories have been rising, according to FDIC data.
Even if consumers keep paying back their loans, their spending
on luxuries such as dining out and vacations is likely to fall,
decreasing revenue that banks earn on those kinds of credit- and
debit-card transactions.
Not Out of Energy
Many of banks' corporate borrowers will also face difficulties
making loan payments in a worsening economy, especially those in
the energy sector. A steep decline in oil prices this week means
oil and natural-gas companies will have less money coming in to
meet existing debt payments and a less valuable asset in the form
of energy reserves that they will be able to borrow against.
If energy prices stay at this level, loan losses in banks'
energy portfolios would notch a "notable uptick," analysts at KBW
wrote in a note on Monday. The four largest U.S. banks have $65.5
billion in exposure to U.S. oil-and-gas companies, and loans to
such companies account for more than 10% of overall portfolios at
several regional U.S. banks, according to KBW.
Markets
Revenue from Wall Street businesses such as investment banking
and trading account for one of banks' biggest sources of fee
income, and both are sensitive to the impact of the coronavirus.
Since the start of the year, reluctance from corporate chiefs to
pursue deals has driven global mergers-and-acquisitions volume down
28% from this point in 2019, according to data from Dealogic.
Citigroup Inc. is expecting investment-banking fees to fall in the
first quarter, finance chief Mark Mason said at an investor
conference Wednesday.
Volatile markets and big swings in stocks, bonds and commodities
kept banks' trading desks busy during the first quarter, but fees
from that business likely won't be enough to offset weakness
elsewhere. Banks employ fewer traders today than they did during
the financial crisis, and with more trading moving to electronic
venues, some fees have come down. Mr. Mason said Citigroup's
trading revenue was expected to increase "in the mid-single-digit
range" in the first quarter, even though trading volumes rose by
much more.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
March 11, 2020 20:20 ET (00:20 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.