As the COVID-19 pandemic continues to spread around the world, its toll on human populations has been accompanied by the disruption of supply chains, industries and whole economies. Almost overnight, people’s lives, business, and countries have had to change.
In the near term, financial institutions in countries affected by the pandemic moved quickly to safeguard their employees, transform their operations, and serve their customers in new ways. Almost immediately, financial institutions have:
- Mobilized control centers and enabled their employees for remote working
- Closed branches and reconfigured, augmented, and secured operations to support changing volumes and business continuity
- Started to adapt their risk and fraud models.
The post-COVID-19 environment will be very different. Many economies will likely be recessionary for an extended period. Financial institutions will have to reconfigure their business and operating models for an environment of higher numbers of non-performing loans and defaults, low interest rates, credit tightening, and capital constraints.
Post-COVID-19 market environment
We expect the global economy to be recessionary. On March 23, 2020, the Institute of International Finance projected a global GDP contraction of -1.5 percent for 2020. Analysts expect S&P earnings to fall 25 percent.
The biggest impact will be due to lower consumption, weaker business investment (as firms reconsider investments), and lower inventory accumulation arising from a combination of supply shock and weakened demand.
Higher credit defaults: Banks have enjoyed record low non-performing-loan (NPL) performance in recent years. Asset-quality deterioration seems likely given the economic disruption caused by business closures and stay-at-home requirements. Depending on the scale of federal assistance programs, defaults are likely to be higher than during the 2007-2008 global financial crisis.
Low interest rates: Many central banks around the world have reduced interest rates to support their local economies. The rapid pace of cutting interest rates will accelerate the compression of net interest margin, impacting a key and significant revenue stream for the banking industry.