Before the deluge – of possible bankruptcies, that is – come the provisions.
Earnings season has shed light on the actions banks are taking to prepare for the possibility that loans will sour amid COVID-19, as many individuals, families and businesses face a cash crunch.
Cash crunches, of course, make carrying debt all the more burdensome. And as reported in the Financial Times, banks that are relatively more dependent on lending activities to keep operations afloat are facing challenges that have not been seen since the financial crisis and recession of more than a decade ago.
There may not be a lot of room to maneuver, as interest rates are already at zero or slightly above zero in countries like the United States and the United Kingdom. Such low interest rates can put lenders in a bind, hitting margins while still not making it easier for borrowers to make payments on what’s owed.
The issue, of course, is the top line – namely, the income that corporates and consumers must make to stay current with expenses and pay down debt.
To get a sense of the magnitude of caution that abounds, the FT quoted Citigroup as estimating that the 15 biggest U.S. banks alone have reserved $76 billion to cover bad loans. And in Europe, the 32 largest banks have set aside 56 billion euros.
That’s the highest tally of provisions seen since the 2008-09 financial crisis, when the number was $186 billion. And we’re not out of the woods yet – the ultimate losses could exceed $880 billion just two years from now. That estimate assumes that banks will set aside 2.4 percent of their loan books to cover expected loan losses, as Accenture estimates.
To drill down and get a sense of what’s happening at the borrowing level, and especially for corporate borrowers, U.K. banks are forecasting that up to half of small business loans will go into default, with an aggregated cost of $34 billion.
In the United States, as detailed in this space last week, lingering shutdowns of brick-and-mortar businesses – especially restaurants and retailers – have led to cash flow pressures. Joint research conducted by PYMNTS and Visa found that nearly half of the 76 percent of SMBs experiencing cash flow turbulence said those challenges come “sometimes” or “frequently,” and are a direct result of the pandemic.
Our latest Main Street SMB survey also found that as many as 37 percent of SMB owners are tapping into personal funds to keep operations afloat, including 26 percent that are using personal credit cards.
The Paycheck Protection Program (PPP) has also proved to be an alternate form of a financial lifeline. But the PPP expired last weekend with $130 billion still in the proverbial till, even as companies were tapping funds extended through the program at an increasing rate. PYMNTS’ ongoing Main Street business surveys found that the share of firms applying for PPP funding had risen to 46 percent of companies surveyed in May, up from 41 percent the month before.