How deep have the markets gone?

Portfolio Lead Advisory Services Weekly Digest - Edition 5

IMF has labelled this pandemic like no other. Global growth for 2020 is projected currently at -4.9 percent, which is 1.9 percent lower than the forecast made in April 2020. Governments, regulators and institutions are navigating an unfolding situation with no clear expectation on how long the pandemic (and restrictions) will last. Indeed, even with the reopening of markets and initial creation of travel bubbles by some, the virus is seeing a resurgence across a number of countries resulting in the reinstatement of operating restrictions. Added to this, we also have a healthy dose of trade wars (no longer limited to US-China) and ever-lingering pockets of regional instability (e.g. Middle East, North Korea, Hong Kong).

Without an established vaccine that can be readily available globally, these disruptive “waves” are likely to continue and the economic crisis will deepen… reducing the asset quality of banks and slowly depleting capital reserves (as explored in our recent publication, Maintaining Balance Sheet Resilience). Already we have seen the early casualties hardest hit by the crisis in the airline, cruise, retail and leisure industries. Undoubtedly we will see more failures as the pandemic drags on, especially when the generous economic relief measures and debt moratoria expire.

It is clear that all banks are bracing themselves for the substantial spike of NPLs (across the piece) that lie ahead that the measures have helpfully masked temporarily. So how deep will the level of NPLs end up and how badly will banks be affected?

Over the next two years, S&P forecast global credit losses of about $2.1 trillion as a result of the pandemic, with $1.3 trillion emanating in 2020 alone – more than double the 2019 level. Although the majority of forecast credit losses are expected to arise in the Asia-Pacific region (c.60%), the highest relative increases are anticipated in North America and Western Europe. At Deloitte, we assume the absolute amount of distressed and non-core assets are likely to be significantly higher.

However, unlike previous crises governments have taken unprecedented action across the system as a whole to support the economies and the banking system. While it is unpredictable how long the pandemic will last and what the “new normal” might look like, it would seem most banks would have the right support and tools to help them navigate through the challenges ahead.

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