We have witnessed a slowing down of the global economy over the past 12 months and the prognosis is that economic growth will remain elusive in 2020.
The COVID-19 pandemic is having a significant impact on the global economy, threatening corporate profits, economic growth and bringing about the very real possibility of a deep and lasting global recession. The pandemic has already caused no end of financial damage and, according to the United Nations Commission on Trade and Development (UNCTAD), will likely cost the global economy USD1 trillion this year.
We have seen governments around the world deploy a range of fiscal policies to mitigate the economic fallout from COVID-19. Governments of the G20 economies have provided fiscal stimulus to the tune of more than USD5 trillion, for example. We have also seen governments and central banks inject extra liquidity into the financial system and cut interest rates. Liquidity support measures such as loans or loan guarantees to businesses have emerged as a key support measure in European countries in particular. A number of the measures unveiled by European governments to tackle the crisis are aimed directly at mitigating an anticipated rise in non-performing loans.
There is no doubt that banks are facing a range of pressure points in light of COVID-19. We note in particular that banks are under growing regulatory pressure to suspend dividends and scale back on senior management bonuses and remuneration. This is in addition to wider political pressures, given that banks have emerged as conduits for government spending policies in response to the pandemic.
The weak outlook for economic growth and continued low interest rates in response to COVID-19 are likely to put further revenue pressure on banks. The COVID-19 outbreak is adding considerably to revenue and profitability challenges faced by European banks.
We can expect to see more banks stepping up their cost-cutting plans in earnest to mitigate these impacts. This is likely to include restructuring, with everything from divestments to reduction in headcount and real estate, remaining high on the agenda.
We are also seeing potential risk emerging in higher leverage accumulating as a result of lower interest rates, potentially setting off a wave of losses for banks and increasing vulnerabilities in the global financial system. Banks’ day-to-day operations may also be threatened by increased levels of cyber-attacks and fraud.
The COVID-19 pandemic is also disrupting banks’ day-to-day operations and will no doubt hurt balance sheets. A number of lenders have warned of hits to profits, an expected surge in loan defaults, plunge in bank stock prices and the need to implement new measures to help customers. The volatility in global financial markets resulting from the COVID-19 pandemic will likely dent global banks’ capital markets revenues in particular, as noted by Fitch Ratings recently.
In summary, banks face yet further tests of resilience.