U.S. Banks Risk Up To $ 320 Billion In Credit Write-offs In 2020 Due To COVID-19, Accenture Report Says
NEW YORK & LONDON & HONG KONG – (COMMERCIAL THREAD) – As many countries around the world shift from public stimulus to private debt to reduce the impact of COVID-19 on the financial system, the burden of keeping the economy running will largely fall on the private lenders. U.S. banks will set aside up to $ 320 billion to cover potential credit losses in 2020 due to financial pressure from the pandemic, according to a new report from Accenture (NYSE: ACN).
Entitled “How banks can prepare for the looming credit crunchThe report predicts that banks around the world will set aside up to 2.4% of their existing credit portfolios to cover expected losses on delinquent loans, nearly double what banks wrote off during the 2008 global financial crisis. The impact will vary across the world depending on the level of government-funded stimulus programs and the severity of the public health aspect of COVID-19. In the United States, about 9% of home loans were outstanding in June, up 6 percentage points from March. In the UK, payment holidays have been granted for one in six mortgages and 1.5 million credit cards and personal loans.
“Banks will play a critical role in helping to absorb the economic impact of the global pandemic and in driving a rapid recovery for consumers and small businesses,” said Alan McIntyre, senior managing director of Accenture who leads its banking practice worldwide. “As government programs wind up, the burden of holding additional capital to protect against credit defaults will weigh on banks’ balance sheets. To inform their credit management strategies, banks will need a clear, data-driven view of the current level of credit risk while keeping a long-term view of the customer at the forefront.
In 2019, US banks set aside US $ 55 billion to cover potential loan losses; Accenture estimates that banks will need to hold an additional $ 210 billion to $ 265 billion to cover potential bad debt cancellations in 2020, depending on the severity of the public health aspect of COVID-19. In Europe, banks could cancel up to US $ 460 billion in 2020, an increase of US $ 370 billion compared to 2019; and in China, banks could cancel up to US $ 360 billion in 2020, an increase of US $ 190 billion from 2019.
In an increasingly debt-driven economy, banks are faced with managing their existing loan portfolios while making decisions about granting new loans. The report notes that this could lead to record levels of global public and private debt, which some analysts say could reach $ 200 trillion by the end of 2020. This could ultimately threaten the ability of companies. and consumers to repay their debts.
Big banks in a strong position when the pandemic struck
Many banks entered the pandemic with the financial resilience to absorb sizable credit losses, with the world’s largest banks holding capital reserves far in excess of what regulators require, according to Accenture analysis. The report notes that the five largest US banks set aside $ 60 billion in reserves in the first half of the year and that European banks set aside nearly $ 18 billion in the first quarter of 2020. These reserves will start to be used as stimulus. funding dries up, leading to delinquent accounts.
“Banks will need to maneuver with caution to strike the right balance between rescuing individual customers and small businesses and protecting their own profitability and solvency,” McIntyre said. “It will require tough decisions about which credit extensions will help an ultimately financially viable customer instead of delaying the inevitable default. To make these decisions, banks can apply the firepower of the data and analytics capabilities they have developed over the past decade to help inform surgical credit management strategies tailored to sectors and areas. specific geographic areas, ultimately providing the kind of high-end treatment typically reserved for high net worth and corporate clients.
Temporary blind spot of banks in credit management
The report notes that in an environment where payment holidays are not reflected in consumer credit scores and where the underlying health of a business is obscured by leave and payroll protection regimes, banks can take a data-driven approach to managing their credit portfolio. This approach can provide a broader context of the current environment and how business and consumer behaviors have changed in the wake of COVID-19.
Over the past decade, banks’ credit management units have shrunk to a rough state. Many banks will need to rapidly increase their resources and collection capacities to a scale beyond what they can traditionally manage to cope with the expected increasing levels of defaults. By combining the digital technologies they have built over the past decade with their frontline employees, banks can provide personalized advice and empathetic advice to deliver creative solutions to help clients bridge the emerging financial divide. dig.
The report provides recommendations on how banks can strengthen their credit management capacities and prepare their businesses and operations for the challenges ahead, while managing potentially conflicting priorities. These include:
engage with regulators to avoid / minimize unintended consequences such as the drying up of new credits;
operate with clear and transparent guidelines on collections and collection;
guarantee fair treatment to borrowers while having a clear view of clients’ creditworthiness; and
manage balance sheet risk while providing advice that helps businesses and consumers navigate the financial crisis.
“While it may be tempting for banks to forgo new credit in the current environment, the demand for credit will increase and be met, if not by banks, then by non-traditional lenders,” said McIntyre. “The competition is not just coming from fintechs and big techs, but increasingly from large, well-capitalized companies offering financing options for their products and services. If banks attempt to aggressively cut credit offers, what could start as a slow trickle of customers turning to alternative lenders could quickly turn into roaring rapids that can drastically change the lending trend. ”
The full report can be accessed here: https://www.accenture.com/us-en/insights/banking/coronavirus-credit-crisis.
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