Bankers expect recession to last into 2021

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Even as states begin to lift stay-at-home orders in hopes of jump-starting their sagging economies, many banking executives are bracing for a prolonged slowdown that could last at least into the first quarter of next year.

As such, banks are considering a number of belt-tightening steps that include freezing salaries and delaying investments in technology and product development, according to survey of executives released Monday by Promontory Interfinancial Network.

The survey results provide a snapshot of how community banks are responding to the coronavirus pandemic and how executives see federal and state efforts to contain its spread playing out over the next several quarters.

The survey of 515 senior leaders at banks with less than $10 billion of assets was taken between April 2 and April 15, while much of the economy was still locked down. Several states have since begun to slowly reopen their economies, but tens of millions of Americans remain unemployed as stay-at-home orders remain in effect in most urban areas.

Roughly 81% of those surveyed said the economy was worse at the end of the first quarter than it was 12 months prior, compared with 12% who reported such a decline when asked at the end of last year, according to Promontory.

"It fell quite dramatically, through the floor almost,” Paul Weinstein, a senior policy adviser for Promontory, said in an interview.

The outlook for the year ahead is bleak as well. Three in four executives surveyed expect the economy to sour further, with barely one in 10 expecting the economy to improve by the end of next year’s first quarter.

One bright spot for banks has been deposit growth. Banking executives report that the race for deposits has cooled off as workers fearing their job security are socking away more savings and businesses that have drawn down their lines of credit are holding that money in their accounts.

Deposits at commercial banks made an unprecedented jump from $13.2 trillion at the start of the year to roughly $15.1 trillion at the end of April, according to Federal Reserve data.

About 20% of executives reported stronger competition for deposits in the first quarter, down from 55% at the end of last year and 86% at the end of 2018, according to the survey.

"People are seeking safety right now,” Weinstein said. “Even those who still have jobs, they’re nervous that they might not have a job at some point down the road, so they are putting away money."

With their banks flush with deposits, about 83% of executives said that funding costs had declined from one year ago, and 30% reported a “significant decrease,” according to Promontory.

Many banks have seen loan demand increase in recent months as companies drew down credit lines or sought emergency relief through the Small Business Administration’s Paycheck Protection Program.

Nearly three-fourths of executives surveyed said that their banks have offered emergency loans to customers whose finances have been upended by the pandemic. Nearly all those surveyed said they have offered some sort of loan mitigation to existing borrowers.

Looking ahead, though, nearly half of executives expect loan demand to fall through March 2021, according to the survey, with the rest split over whether demand will stay the same or increase some.

“There’s a lot of uncertainty trying to figure out when normal is going to come back,” said Matt Flannery, team leader of Small Business Administration lending at the $9.9 billion-asset Provident Financial in Jersey City, N.J. “All the uncertainty is causing people to be more conservative. The more banks that pull back from lending, the less money will be out there for the recovery.”

Most banks are putting their own plans on hold. Nearly two-thirds of the executives surveyed said that as the U.S. heads into a recession they plan to delay the development or rollout of new products and services, and roughly half are freezing salaries.

The Federal Reserve lowered interest to near zero in March and there has been widespread speculation that the central bank could lower its main borrowing rate even more, into negative territory, in hopes of jump-starting the economy. But two-thirds of executives surveyed said they believe the Fed would avoid such a move.

The survey was taken before Fed Chairman Jerome Powell said in a May 13 speech that the central bank has ruled out additional rate cuts. Even as President Trump continues to push the idea on Twitter, Powell stressed the Fed could only do so much to ease the economic impact from the pandemic.

Promontory conducts the survey quarterly, and Weinstein said he doesn’t expect bankers’ views on negative rates to change all that much in the next survey.

“Powell has doubled down that they’re not going to move to negative rates even though the president has called for it and others have called for it,” he said. “The only way that the survey results might shift is if Trump really turns up the heat. But I don’t think Powell will budge."

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Economy Deposits Commercial lending Paycheck Protection Program Coronavirus Community banks