Bank CRE losses expected to spike; digital payments boom
Wall Street Journal
Stress test questions
Bankers are wondering if this year’s stress tests — due April 6 — are even worth it, given that the damage caused by the coronavirus may actually be worse than the “severely adverse” conditions the Federal Reserve wants them to prepare for. “As of now, the banks and Fed are operating as scheduled, even as the central bank is also rolling out extraordinary measures designed to keep markets functioning. The Fed on Tuesday said it would relax some examination work, particularly at smaller banks, but that big banks should still submit their plans,” the Wall Street Journal reports.
The Fed said it will "temporarily stop all examination activity for banks with less than $100 billion of assets," American Banker reports.
Separately, the Fed “may ultimately need to release banks from more constraints on their balance sheets, as it has done in some respects for their liquidity,” the Journal says. “Already, for example, banks that make purchases of assets from money-market funds to support them using money from the Fed’s backstop facility will be able to exclude those assets from capital calculations. But to ensure that banks don’t themselves become new overleveraged problems, the Fed needs to keep making sure that whatever banks need to load onto their balance sheet for the sake of the system isn’t just compounding risk or leverage in the system. That will partly be done with the help of Congress and the U.S. Treasury, which will provide forms of credit protection.”
For bank investors, “it will be extremely difficult to model banks’ profitability in the future," the paper adds. "But that certainly beats fretting about banks’ survival.”
It's been worse
“U.S. banks face crushing losses from commercial real-estate loans damaged by the Covid-19 economic crisis, but the pain might not be as great as in the years following the 2008 crash,” according to a report by Trepp, which tracks the performance of commercial mortgages. “Commercial real-estate loans made by banks will suffer as much as a 2.5% loss rate over the next five years,” the firm said, which would amount to $57.5 billion. “By comparison, loss rates last year were less than 0.1%.”
However, “the default rate on loans might be less this time than during the last financial crisis,” when the peak default rate was 4.4%.
Still, the market for issuing commercial-mortgage backed securities “has frozen up, leaving some of the biggest names on Wall Street stuck with billions of dollars of loans that are rapidly deteriorating in value.” For example, a banking group led by Citigroup may be stuck with a $2 billion loan it made last month for two properties in Las Vegas, the paper says.
“Digital-payment services are facing a surge in demand as efforts to stem the novel coronavirus pandemic result in housebound shoppers stocking up on groceries, prescription drugs, audiobooks and movies online," the paper reports. "Merchants are dealing with challenges in handling the sheer volume of payment-processing needs, whether their payment services are in house or third parties.”
In Italy, for example, “one of the first countries to order residents to stay home in a bid to prevent the virus from spreading, e-commerce transactions have soared 81% since the end of February, according McKinsey.”
Speaking of digital, “there is a push from some legislators [in Congress] to give the Federal Reserve a new tool some believe could radically reshape how it conducts monetary policy," the paper says. "At issue are so-called digital dollars that would be set up as a way to speed payments to households that need support. As things now stand, the U.S. government lacks the infrastructure to disperse payments widely, and given the nature of the current crisis, speedy action is critical.”
“In the longer run, Fed accounts could also help make monetary policy more powerful and help it bypass a fickle financial system and head right to Main Street. Instead of the Fed taking action to influence market rates, which can be a fraught process, it could offer interest-bearing accounts directly to the public. Then, by changing rates at that level, or even straight up adding Fed-created money to the accounts, it could influence economic decision-making at the household level,” the paper says.
In fact, House Democrats proposed using digital dollars to make some payments in an early version of its coronavirus stimulus package, American Banker reports.
Europe’s “already fragile” banks may find themselves “struggling with new sour loans on top of old, which spells trouble.” European banks “were only halfway through cleaning up €1.2 trillion ($1.3 trillion) of loans that turned sour in the last crisis when disaster struck in the form of the new coronavirus. But now the market for nonperforming loans, or NPLs, is in disarray as investors brace for recession in Italy and other coronavirus-hit countries such as Spain and Portugal.”
Clifford Chance, the London law firm hired by Swedbank to investigate whether the bank engaged in money laundering, said “it found the Swedish lender had inadequate systems to manage risk but didn’t conclude that it engaged in money laundering.”
Thanks to regulators
Non-bank lenders will bear the brunt of the current credit crisis, as “financial risk has been pushed from banks into the shadows,” the paper reports. “Borrowers will default on consumer loans, auto loans and mortgages. Eventually some of this will find its way back to the banks. But even if shadow banks suffer in the short term, we are in a better place today because regulators forced greater protections on the banking system.”
Citigroup said it will shut 15% of its U.S. branches temporarily in response to the coronavirus outbreak, Reuters reports, with the closings expected by the end of the week. It also said it would “temporarily reduce branch hours and redeploy staff to ensure access to essential services.”
“Citi’s move follows other large banks that have begun to scale back some retail operations in order to reduce the spread of the coronavirus while keeping critical banking services like accessing deposits available to customers.”
The move is partly a result of declining foot traffic at branches, American banker reports.
Wells Fargo said it “will join other large U.S. banks in paying out special compensation to front-line employees," Reuters reports. The bank said “all of its domestic full-time employees who make less than $100,000 a year would receive a pre-tax payment of $600 and part-time employees would get a $300 bonus. Front-line employees like branch workers, call-center staff and technology specialists who are required to come into the office as others work from home will receive an additional $200 per pay period starting April 17 for up to five paychecks.”
On the negative side, Wells “has also decided not to pay out a discretionary profit-sharing 401(k) contribution for 2019, citing the bank’s financial performance last year and the ‘extraordinary environment.’”
“The severely adverse scenario looks pretty rosy right now.” — Pete Gilchrist, executive vice president of Novantas, a bank services company, noting the current economic reality is worse than the worst-case scenarios envisioned in the Fed’s stress tests