Bankers come to grips with coronavirus impact
Amid increasing alarm about the spread of the coronavirus, large U.S. banks are beginning to speak publicly about the multitude of risks they face from a global health crisis.
The big banks are facing growing pressure to address the outbreak’s potential financial impacts as rattled investors sell off their stocks. The KBW Bank Index, which includes large and regional U.S. banks, fell 13.8 % this week, compared with a 9.3% decline in the S&P 500.
The World Health Organization said Friday that it has increased its assessment of the risk of spread and the risk of impact of the COVID-19 virus to “very high” across the globe.
The big banks’ assessments of the likely effects on their businesses — which came this week at an investor conference and in meetings with analysts — illustrate the varied ways in which dominoes can fall in an interconnected global economy.
Bankers said that their bottom lines may be hurt by interruptions to supply chains, a reduction in business travel and direct exposure to China and other parts of Asia that have been hit hard by the outbreak. In some cases, they also described steps that they are taking to prepare for more dire scenarios.
“I think it’s too early to tell whether this persists,” Morgan Stanley Chief Financial Officer Jonathan Pruzan said at an industry conference on Thursday. “If it persists, it will have an impact; if it doesn’t, I think it will be relatively manageable.”
American Express CEO Steve Squeri highlighted the impact that the outbreak is already having on travel as the public’s fear of contagion grows.
Amex, a leading provider of payment cards for business travel spending, has seen significant reductions in spending in mainland China, Hong Kong, Singapore and Taiwan, Squeri said Monday in a meeting with analysts.
Amex derives 8% to 9% of its net revenues from the Asia-Pacific region, which also includes less-affected countries such as Japan and Australia.
To the extent that coronavirus continues to spread in Europe and in the Western Hemisphere, it has the potential to be more detrimental to Amex, the company’s CEO noted. Still, he remained bullish on the company’s growth outlook.
William Ryan, an analyst at Compass Point Research & Trading, said that he is waiting to see whether New York-based Amex reduces its guidance on customer spending.
“I’d characterize this as a spending event,” Ryan said. “Obviously if the virus takes a toll on the economy and starts to tip us over, and companies are forced to downsize or lay off or whatever it might be, then it would be more of a credit event.”
In remarks Thursday at the Credit Suisse Financial Services Forum in Miami, Wells Fargo Chief Financial Officer John Shrewsberry described how negative repercussions for the travel industry may affect commercial lending at banks.
The airline industry, the cruise ship industry and the hotel industry are all examples of sectors that may curtail borrowing from banks as a result of declining revenue. To cite just one example of the revenue impacts, Hilton temporarily closed 150 hotels in China in February.
Meanwhile, Discover Financial Services addressed the steps it would take to help U.S. customers who suffer financially as a result of the outbreak. CEO Roger Hochschild said that the credit card issuer has yet to see an impact on its customers but indicated that the Riverwoods, Ill.-based company will offer temporary credit line increases and hardship programs in the event that such effects materialize.
“So to the extent our customers can’t work and have interruptions to their income, we will stand ready to help them,” Hochschild said Friday at the investor conference in Florida.
Ted Rossman, an analyst at CreditCards.com, noted that card issuers are particularly sensitive to consumer confidence.
“I do fear that the economic and societal impacts will get worse before they get better,” Rossman said in an email. “The ripple effects will be massive if our schools, workplaces, transit systems and entertainment destinations shut down like they have in other countries.”
Ally Financial, a leading provider of financing for both car buyers and auto dealers, is waiting to assess any impact that the coronavirus has on the auto industry’s supply chain, according to Chief Financial Officer Jennifer LaClair, who spoke Thursday at the same investor conference.
Some Chinese factories were temporarily shut down as a result of the outbreak, giving rise to fears that North American auto factories could run out of certain parts in the coming weeks.
Still, LaClair said, “It’s hard to say if there’s been any direct impact on supply chain.” She indicated that if there is such an impact, it would likely have negative implications for the segment of Ally’s business that provides financing to auto dealers that are seeking to purchase new vehicles.
The pressure on large U.S. banks to describe the business risks they face from the coronavirus increased late this week. On Friday, Sen. Elizabeth Warren, D-Mass., sent letters to the CEOs of Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley asking them to explain how they are monitoring and preparing to mitigate the economic risks.
The letters listed a number of possible ways that banks could be affected — including stock market declines, interest rate changes and even the potential for civil unrest in hard-hit countries — and argued that the threats may be difficult to predict or model.
In a statement Friday afternoon, Federal Reserve Board Chair Jerome Powell said that U.S. economic fundamentals remain strong, but that the coronavirus poses evolving risks to economic activity. His comments came at the end of a week in which investors looked to the Fed for signs about a potential interest rate cut that could help sustain the economy.
“The Federal Reserve is closely monitoring developments and their implications for the economic outlook,” Powell said. “We will use our tools and act as appropriate to support the economy.”
Meanwhile, Wall Street analysts sought to estimate the impacts that the coronavirus will have on particular banks and the industry as a whole. Banks that have greater exposure to China, including the $44 billion-asset East West Bancorp in Pasadena, Calif., could suffer more damage. East West’s shares fell 12.2 % this week and are down about 22% since Jan. 1.
Trust banks such as State Street and Northern Trust, which have heightened exposures to downturns in stock market, could also face more downside risk.
Median earnings per share could decline by 6.2% this year and 10.6% in 2021 under a forecast by Keefe, Bruyette & Woods, as a result of what it sees as slower loan growth and compressed margins from lower interest rates. Under a more dire scenario in which the economic slowdown that results from the virus is more protracted, the median earnings per share could decline by as much as 28%, the KBW analysts wrote in a research note.
“We do not believe that a deeper slowdown has been priced in at this point in time,” the note stated.
Stephen Biggar, an analyst at Argus Research, argued in an interview Friday that the coronavirus outbreak will probably be a “one-quarter event.”
But he also said, “I think the general feeling is uncertainty — that it’s incalculable until we get a handle on what the impacts will be.”
Allissa Kline and Jon Prior contributed to this report.