U.S. Banks Face Up to US$320 Billion in Credit Write-offs in 2020 Due to COVID-19, Accenture Report Finds
July 28 2020 - 7:59AM
Business Wire
Banks ramp up credit management capabilities to
help support small businesses and consumers weather the financial
impact of the global pandemic
As many countries across the globe shift from public-led
stimulus to private-led debt to reduce the impact of COVID-19 on
the financial system, the burden to keep the economy running will
largely fall to private lenders. U.S. banks will set aside up to
$320 billion to cover potential credit losses in 2020 due to the
financial strain of the pandemic, according to a new report from
Accenture (NYSE: ACN).
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Banks’ cost of risk in times of
crisis
Titled “How Banks Can Prepare for the Looming Credit Crisis,”
the report projects that banks globally will set aside up to 2.4%
of their existing credit books to cover expected losses in unpaid
loans ―nearly double what banks wrote off during the 2008 global
financial crisis. The impact will vary across the globe depending
upon the level of government-funded stimulus programs and the
severity of the public health aspect of COVID-19. In the U.S.,
around 9% of home loans were in forbearance as of June, up 6
percentage points since March. In the U.K., payment holidays were
issued on one in six mortgages and 1.5 million credit cards and
personal loans.
“Banks will play a critical role in helping absorb the economic
impact of the global pandemic and stimulating a rapid recovery for
consumers and small businesses,” said Alan McIntyre, a senior
managing director at Accenture who leads its Banking practice
globally. “As public programs wind down, the burden of holding
extra capital to protect against credit defaults will fall on
banks’ balance sheets. To inform their credit management
strategies, banks will need a clear-sighted and data-driven view of
the current level of credit risk while keeping a long-term view of
the customer at the forefront.”
In 2019, U.S. banks set aside US$55 billion to cover potential
loan losses; Accenture estimates that banks will need to hold an
additional US$210 billion to US$265 billion to cover potential
write-offs for bad loans in 2020 depending on the severity of the
public health aspect of COVID-19. In Europe, banks might write off
up to US$460 billion in 2020, an increase of US$370 billion from
2019; and in China, banks might write off up to US$360 billion in
2020, a US$190 billion increase from 2019.
In the increasingly debt-driven economy, banks are faced with
managing their existing loan books while also making decisions
around extending new credit. The report notes that doing so could
lead to record levels of public and private debt worldwide, which
some analysts predict could reach as high as $200 trillion by the
end of 2020. This might ultimately threaten the ability of
businesses and consumers to repay their debts.
Large banks in a position of strength when the pandemic
hit Many banks entered the pandemic with the financial
resilience to absorb considerable credit losses, with the world’s
largest banks holding capital reserves well above what regulators
require, according to Accenture analysis. The report notes that the
top five U.S. banks set aside US$60 billion in reserves during the
first half of the year and that European banks set aside almost
US$18 billion in the first quarter of 2020. These reserves will
start to be drawn down as stimulus funding dries up, causing
accounts to go delinquent.
“Banks will have to maneuver carefully to strike the right
balance between rescuing individual and small business customers
and protecting their own profitability and solvency,” McIntyre
said. “This will require difficult decisions around which credit
extensions will help an ultimately financially viable customer
versus delaying the inevitable delinquency. To make these
decisions, banks can apply the firepower of data and analytics
capabilities that they’ve built over the past decade to help inform
surgical credit management strategies tailored for specific
industries and geographies ―ultimately providing the type of
high-end treatment typically reserved for high-net-worth and
corporate customers.”
Banks’ temporary blind-spot in credit management The
report notes that in an environment where payment holidays aren’t
being reflected in consumers’ credit scores and the underlying
health of a business is masked by furlough and payroll protection
schemes, banks can take a data-driven approach to manage their
credit portfolio. This approach can provide a broader context of
the current environment and how business and consumer behaviors
have changed as a result of COVID-19.
Over the past decade, banks’ credit management units have shrunk
back to bare bones. Many banks will need to quickly scale up
resources and collections capabilities to a magnitude beyond what
they can traditionally handle to meet the expected rising levels of
default. By combining the digital technologies they’ve built over
the past decade with their people on the front lines, banks can
provide personalized advice and empathetic guidance to offer
creative solutions to help customers bridge the widening financial
gap.
The report provides recommendations for how banks can strengthen
their credit management capabilities and prepare their business and
operations for the challenges to come, while managing potentially
conflicting priorities. These include:
- engaging with regulators to avoid/minimize unintended
consequences such as new credit drying up;
- operating with clear guidance and transparency on collections
and recovery;
- ensuring fair treatment for borrowers while also having a clear
view of customers’ creditworthiness; and
- managing balance sheet risk while providing advice that helps
businesses and consumers navigate through the financial
crisis.
“While it might be tempting for banks to pull back on extending
new credit in the current environment, the demand for credit will
rise and be met ― if not by banks then by non-traditional lenders,”
McIntyre said. “Competition isn’t coming just from fintechs and big
tech, but increasingly from large, well-capitalized companies
offering finance options for their products and services. If banks
attempt to aggressively reduce offers of credit, what might start
as a slow trickle of customers turning to alternate lenders could
quickly become roaring rapids that can drastically change the tide
of lending.”
The full report can be accessed here:
https://www.accenture.com/us-en/insights/banking/coronavirus-credit-crisis.
About Accenture Accenture is a leading global
professional services company, providing a broad range of services
in strategy and consulting, interactive, technology and operations,
with digital capabilities across all of these services. We combine
unmatched experience and specialized capabilities across more than
40 industries – powered by the world’s largest network of Advanced
Technology and Intelligent Operations centers. With 513,000 people
serving clients in more than 120 countries, Accenture brings
continuous innovation to help clients improve their performance and
create lasting value across their enterprises. Visit us at
www.accenture.com.
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Melissa Volin Accenture +1 267 216 1815
melissa.volin@accenture.com
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