Banks face a triple threat: excruciatingly low interest rates; recently stiffened regulations about lending criteria and cash reserves; and the virus epidemic that is slashing business borrowers’ cash flow and threatens their ability to make loan payments.
U.S. banks gain about two-thirds of their revenue from charging interest on loans and securities. Those interest rates are tied to benchmarks set by the Fed. As the Fed cuts rates, banks lose income.
A 1-percent cut in interest rates costs Bank of America about $6.54 billion or 7 percent of its 2020 income, according to an estimate by Credit Suisse.
Many large banks also have partnerships with airlines to help expand credit card revenue… but the virus has now shut off large segments of the travel industry.
TRENDPOST: As the world’s economy shuts down and people have no income, more will fail to keep up payments on their mortgages, car loans, and credit cards, pinching banks’ revenues even more.
Even when economies recover from shock, consumers tend to spend less. That means fewer credit card charges banks can collect for restaurants, vacations, and non-essentials, thus putting more downward pressure on bank earnings.
Big and Cheap
Normally, big banks can offset low interest rates with income from credit cards or by trading in stocks or bonds. But bond yields have dropped and borrowers – both businesses and credit card holders – are piling on debt at a time when many are facing reduced incomes.
Mergers and acquisitions, another key source of bank income, have fallen 28 percent in number compared to the first quarter of 2019.
The Euro Stoxx Bank Index fell 13 percent and the KBW US Bank Index gave up 11 percent the same day.
France’s Natixis and Crédit Agricole banks, with a larger portfolio of energy industry loans, lost 18 and 17 percent, respectively.
French giant Société Générale lost 18 percent. Share prices of Italy’s Unicredit and Intesa Sanpaolo shrank by 13 and 12 percent.
Italy, where Europe’s virus outbreak is currently the most intense, has locked down 16 million people across 14 provinces. The lack of commerce threatens to reawaken a crisis of failed loans that the country’s banking industry has struggled for years to correct.
Energy loans have become many banks’ biggest concern.
The four largest U.S. banks hold $65.5 billion in loans to oil and gas companies, a sector of the economy falling faster than virtually any other. If current oil prices last for more than two weeks, the banks will see a “notable uptick” in losses from these loans, according to analysts at KBW.
Such loans make up 10 percent or more of portfolios at many U.S. regional banks. Cadence Bancorp, Cullen/Frost Bankers, Texas Capital Bancshares, and BOK Financial, all based in Texas or Oklahoma, have seen their share prices plunge at least 20 percent along with oil prices.
“There is unmitigated selling” of bank stocks “if you have Texas in your name or energy [loans] in your portfolio,” said analyst Brad Milsaps at Piper Sandler.
Analysts looked for silver linings. Kian Abhouhossein at JPMorgan noted that prices were down only to 2016 levels and “European bank losses were manageable over that period.”
“Most banks have cut energy exposure dramatically since the last energy shock and have been tightening underwriting standards for quite some time,” said Anton Schutz at Medon Capital, which manages portfolios of bank stocks.
