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The coming wave of non-performing loans is right on track

In the early stages of COVID-19 many banks were focused on a short to medium term downturn, triaging only the most affected / impacted sectors.  Then the PPP program came and went, effectively buying time for many businesses and allowing the clock to be “reset”.

As little progress has been made containing COVID-19, the realization is starting to set in that we are yet to see the worst of the economic damage.  Many banks are now bracing for a much more protracted downturn, in which most, if not all sectors will see significant credit deterioration.

Following news that the four largest US banks have effectively doubled loan loss reserves – regional banks are starting to follow suit.  In addition to increased provisioning, many are just beginning to determine a broader balance sheet strategy.  Continuing on the “wave” reference, the “crest” has not yet appeared.

Many banks are still trying to support their customers as best they can – and the likely second wave of financial stimulus will supplement this effort and reset the clock again.  Despite the warning signs, it is simply too early in the COVID-19 cycle for the determination to be made which customers will have to be cut or scaled back.

That said, this difficult decision process will come sooner than expected.  Banks will need to be prepared with a pre-conceived strategy to effectively navigate this crisis.  For many, this will be shrinking balance sheets while for others this will be adopting new strategies and technologies that were never needed before.  When this wave does crash, one thing will be for sure – the “winners” will be those who acted early to best position themselves ahead of their competitors.