Loan loss worries are expected to weigh on banks for some time, but analysts say the sector will be able to muddle through a challenging 12 to 24 months.
Banks have been more cautious about lending to higher risk industries in the years since the last financial crisis but few could have fully prepared for a situation such as the coronavirus, which has simultaneously crippled industries across the board.
Whereas prior credit cycles saw flare-ups in certain industries with spillover effects into others, the forced economic shutdowns to limit the spread of coronavirus were different—swiftly impacting multiple industries at once. Travel-related businesses and retailers were negatively impacted by shutdowns, as were restaurants and oil-and-gas companies once demand dried up.
“Investors and bankers do not know the full extent of the impact from the COVID-19 coronavirus,” Gerard Cassidy, analyst at RBC Capital Markets, said in a note Friday.
For the banks—lenders to these beleaguered industries—times have been tough. Their loan exposure to individual industries was thought to be manageable but with so many industries negatively impacted at once, that picture gets murkier.
Cassidy analyzed the loan portfolios of the nation’s largest banks to see which had the largest exposure to “total elevated-risk loans” such as energy loans, leveraged loans, and other Covid-19-exposed areas.
(ticker: RF) topped Cassidy’s list with 24% of its loan book being exposed to risky areas, reflecting 190% of the bank’s tangible common equity.
(JPM) came second on the list as 16% of its loans are to elevated-risk industries. (JPMorgan’s loans account for 92% of tangible common equity, placing it on the bottom half of the list by that metric.)
Capital One Financial
(COF) was on the bottom of the list, with only 2.5% of its loan book being in riskier areas, equating to 18% of the bank’s tangible common equity.
Still, Cassidy was hopeful for the sector when it comes to expected credit losses—at least when compared with the financial crisis of 2008-10 where he measured that cumulative credit losses for the 20 largest banks averaged 7.7%. He doesn’t expect they will be that high this time around.
“The lower expected credit losses can be attributed to stronger underwriting standards, de-risked balance sheets and shorter term…