COVID-19 and Banking - Assessing the Impact
Although the COVID-19 pandemic is still very much with us - with over 17 million currently infected patients and over 100,000 in serious or critical condition at time of writing - there is still a sense that the world is beginning to open up once again and returning to some semblance of normality.
Almost every industry has seen massive challenges over the last 18-20 months (even if some of those challenges involve what to do with all the money - looking at you, Amazon) and it may be some time before we can fully grasp the damage this crisis has wrought on our lives, planet, businesses, and economies.
Banking was already in a transitory phase before anyone even heard the term COVID-19, so now would seem a prudent time to take stock and see if the pandemic has altered that trajectory or accelerated it.
COVID-19 Impact
Recent research by leading global professional services firm Deloitte has sought to answer many of the questions being asked by the banking sector right now.
The research, in the form of a survey, contacted 69 chief risk officers and heads of departments across 12 countries and focused on four key areas - economic recovery, loan dynamics, non-performing loans, as well as restructuring and workout priorities. To ensure a holistic view, representatives from investment firms and debt purchase and collection brands were also asked for their perspectives.
The main issue surrounding the impact of COVID-19 on banking is the larger economic downturn and recession being suffered by the world at large due to the lack of productivity and the temporary shuttering of many businesses. This has led to people struggling to meet financial commitments and many financial brands have been forced to hit pause on loan agreements.
"Being several months into an economic downturn brought by the emergence of the COVID-19 pandemic, all market players need to face unprecedented challenges, and this makes no exception to the banking industry either," said Albert Marton, Partner at Deloitte. "Banks need to face the possible acceleration of new defaults, thus an increased level of loan losses as well as a decline in interest, fee and commission income due to the contraction of economic activity, not to mention the already experienced and potential future operational concerns."
When we compare this situation to the global financial crash experienced in the first decade of the 21st Century, the industry is actually in a much healthier position to handle its challenges. Thanks largely to lessons learned from that crisis, many banking organizations have maintained larger coffers in the form of larger capital buffers and stronger liquidity positions to protect themselves from future potential economic damage - such as the one we face now.
Economic Recovery
The general consensus regarding economic recovery is positive, with most survey respondents predicting a slow but inexorable improvement over the next 12 months. 75% of the participants lauded the application of moratorium - a legal authorization to debtors to postpone payment - as an important step on the road to recovery.
Loan Dynamics
It should come as no surprise that loan disbursements are predicted to continue to decrease as we move through the last quarter of 2021. The credit standards of households and corporations are expected to remain tight due to the economic outlook, elevated credit risk, and banks' lower tolerance for risk.
NPLs
A significant proportion of respondents made clear an intention to dispose of non-performing loans. However, many investors said they would continue to purchase during the pandemic, but to be far more selective and cautious when it comes to choosing which deals to place their stakes on.
Restructuring and Workout
"Nearly one-third of respondents think that 5-10% of debtors in the retail segment with liquidity difficulties will require restructuring over the next 12 months," said the report. "One-third expect that even more, 10-20% of households will require restructuring. In case of corporate debtors, nearly a quarter of participants anticipate that due to liquidity difficulties 10-20% of borrowers will require restructuring overt the next 12 months."
While a significant proportion of banks believe they have sufficient human resources to handle the inevitable loan restructuring and workout cases, a fifth do not believe this to be the case, with 40% ready and willing to seek third-party assistance in this regard.
Branches
A separate March 2021 survey from Deloitte, focusing on the impact of COVID-19 on the digital banking momentum, unsurprisingly reveals that the pandemic proved to be a catalyst for digital banking.
Almost every bank, large and small, saw a spike in digital banking usage, the report notes, as many customers were pushed to use online and mobile banking like never before – and some (especially in the older cohorts) for the first time.
Will these new (sometimes involuntary) digital banking behaviors stick, and what do they mean for the future of the bank branch.
Deloitte’s survey indicates that consumers’ preferences for digital banking are very much “context dependent.” As the report puts it: “They may use digital channels for many routine transactions, but for services that are complex and involved, many surveyed customers will want in-person interactions, even as their needs are evolving with changing social, economic, cultural, and technological trends. […] Some of these episodic interactions may return to the branches, especially among cohorts more comfortable with live, in-person interactions. In fact, branches are likely to remain pivotal to banks’ overall revenue growth and strengthening customer relationships. However, banks should capitalize on the digital banking momentum by blending digital and human experiences.”
Broadly, the report indicates that consumers will likely continue to prefer the convenience of digital channels for simple, transactional activities, such as paying bills, transferring funds, or depositing checks. This is true even for the Baby Boomer generation, one-half of whom have now become comfortable with online banking for simple transactions. Gen Zers and Millennials, meanwhile, are likely to use mobile banking apps much more frequently. However, beyond the transactional, the bank branch is still the preferred medium for nearly all other banking services, including getting financial advice, applying for loans, inquiring about new products, and opening new accounts.
(Image source: deloitte.com)
Final Thoughts
When it comes to loans and investments there is little doubt that the banking sector is in for a significant challenge. However, more preparation work now means the industry will be in better shape to get back to normal as soon as possible. Thanks to the previous banking crisis, most banks are now veterans of these kinds of challenges and are well prepared to meet them head on.
As for the future of the bank branch, the pandemic has indeed accelerated the adoption of digital banking – but the branch remains crucial to customers. It seems, therefore, that it may become increasingly normal for customers to engage in multi-channel journeys – leaving banks with the challenge to connect the dots from mobile app to customer service center to physical branch to ensure a smooth experience for every customer. As the Deloitte report observes: “It’s important that banks’ technology systems are tightly integrated to allow for a seamless exchange of data between physical and digital channels so that consumers can migrate from one channel to another with ease. This increasing proclivity to use both physical and digital channels, especially among the younger consumers, is giving rise to a new set of expectations for interconnected experiences.”
COVID-19 and its impact on the banking sector is set to be a hot topic at Future Branches 2021, taking place in December at the Hyatt Regency, Austin, TX.
Download the agenda today for more information and insights.