COVID-19: Global Banking Industry To Suffer Credit Loss

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The potential for economic recovery for the global banking industry in the near term remains uncertain. The pandemic is set to pose a double-pronged problem for the industry in the months and years to come.

According to the research data analyzed and published by Comprar Acciones, in the first stage, banks will suffer severe credit losses. During the period between 2020 and 2021, foregone revenue will amount to $1 trillion. Loan loss provisions for the same period are projected to reach $1.9 trillion.

The second stage is estimated to run from 2020 up to 2024. Within that five-year period, banks are estimated to lose $3.7 trillion of revenue.

Based on the report, this is the equivalent of over six months of industry revenue that will be lost and never recovered. This figure is the base scenario and could go as high as $4.7 trillion.

A revenue loss of $3.7 trillion would be a 14% fall compared to pre-pandemic growth projections.

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During the third quarter of 2020, banks around the world set aside $1.15 trillion as Loan-Loss Provisions (LLPs). This was much higher than the amount of provisioned throughout 2019.

Due to forbearance programs and government support, banks have yet to take substantial write-offs. But McKinsey points out that this state of suspended animation is unlikely to last forever. Based on its base scenario, in the coming years, LLPs will surpass those of the Great Recession.

Credit Losses in the Global Banking Industry

Losses are to be expected in every segment. But the report highlights that they might be most acute for the credit card category as well as for SMB loans and commercial real estate.

SP Global projects a $2.1 trillion credit loss for banks across the globe in 2020 and 2021. In 2020 alone, the loss is estimated to reach $1.3 trillion. This would be more than double the level recorded in 2019, at $603 billion. The figure is estimated to drop to $825 billion in 2021.

60% of the losses forecast in the report are expected to take place in APAC.

From the $926 billion increase in credit losses in 2020 and 2021, APAC will account for $518 billion. China will dominate with $398 billion in credit losses.

North America will account for $240 billion of the increase, while Western Europe will account for $120 billion.

According to SP Global, pre-provision earnings should be able to absorb the losses. Further upticks would, however, take a toll on banks’ ratings, with some recording net losses.

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