Euromoney in one of its most recent publications stated that banks generally came into the coronavirus pandemic much stronger than they went into the global financial crisis. But will the capital and liquidity buffers they have built over time be sufficient to see them through this most dramatic economic crash in history?
The International Data Corporation [IDC] based in UK and Ireland has also painted the following grim narrative about countries in Europe:
• In the past two weeks, European governments have been introducing aid programs to ease the economic pressure brought about by the COVID-19 outbreak and the inevitable economic downturn that will follow;
• The size of those programs is astronomic. Germany plans an €822 billion economic aid package — amounting to 26% of annual German GDP — and says it will make more available if needed;
• The UK Treasury introduced a £330 billion package — 15% of annual GDP. The Czech Republic plans to guarantee loans to business to the tune of 19% of GDP;
• But the aid bridges only a limited and unknown period. Governments are making a risky call. If the pandemic triggers a full-blown recession causing widespread defaults, mass unemployment and severe loss of life, the relief and stimulus funds could fail to revitalize the economy and even larger amounts will be needed ;and
• This could pave the way for the next sovereign debt crisis given the prevalence of debt-financed government responses in Europe.
The World Bank Group is also making available an initial package of up to $12 billion in immediate support to assist countries coping with the virus. This financing is designed to help member countries take effective action to respond to and, where possible, lessen the tragic impacts posed by the COVID-19.
The US has taken the following drastic actions to stabilize the US economy: reduced federal funds rate by 50bp (unscheduled); increased repo offerings by $75 billion; extended maturity distribution of Treasury security purchases; increased term repo operations by large amount (more than $1 trillion); reduced federal funds rate by 100bp to near zero; announced purchases of $500 billion in longer-term Treasury securities and $200 billion in agency mortgage-backed securities; reduced primary credit (discount window) rate by 150bp to 0.25 percent; announced miscellaneous other steps to support the flow of credit; coordinated central bank action to enhance the provision of global US dollar liquidity; urged banks to use capital and liquidity buffers in joint supervisory statement; announced Commercial Paper Funding Facility; announced Primary Dealer Credit Facility; announced Money Market Mutual Fund Liquidity Facility; established temporary dollar liquidity arrangements with additional central banks; coordinated central bank action to further enhance the provision of US dollar liquidity; expanded money market mutual fund liquidity facility to make loans secured by certain municipal money market mutual funds; provided additional information to encourage financial institutions to work with borrowers affected by COVID-19; announced Treasury purchases and agency MBS in “amounts needed”; included commercial MBS in purchases; announced measures to provide a combined $300 billion in new financing, including $30 billion from the Exchange Stabilization Fund (ESF); established Primary and Secondary Market Corporate Credit Facilities; established Term Asset-Backed Securities Loan Facility enabling asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration, and certain other assets; expanded Money Market Mutual Fund Liquidity Facility and Commercial Paper Funding Facility; launched Contingent Term Repo Facility; working with other financial supervisors, communicated to banks various regulatory actions to encourage lending.
The Central Bank of Nigeria [CBN] has also announced the following measures in response to nCOVID 19:
• All CBN intervention facilities granted moratorium of one year on all principal repayments effective March 1, 2020;
• Interest rates on all applicable CBN intervention facilities reduced from 9.0% to 5.0% for 1 year effective March 1, 2020;
• Established a N50 billion targeted credit facility through the NIRSAL microfinance bank for households and SMEs vulnerable to the COVID-19 pandemic;
• Opened intervention facilities and loans to pharmaceutical companies intending to expand operations and set up drug manufacturing plants;
• Granted Deposit Money Banks leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households most affected by the outbreak of COVID-19;and
• Strengthened CBN’s LDR policy to support credit growth. The CBN would further support industry funding levels to maintain DMB’s capacity to direct credit to individuals, households and businesses.
The measures taken by regulators and governments across the globe are indication that banks sit at the heart of the economy and provide funding to corporates and individuals. Their stability is crucial to keep the system up and running. So what are the likely events or challenges that would happen in the banking industry as a result of Covid 19?
Ask any banker how capable the industry would be able to weather this economic shutdown and the first thing they will mention is much higher levels of common equity capital. Bankers tend to be optimists. They want to believe the lockdowns will be short lived and the subsequent recovery robust. They want to send a positive message. Which is Okay.
It is true that since the global financial crisis, many banks globally have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. Many Banks in Nigeria have also done quite well.
According to Sam Theodore, CEO-Scope Insights, ‘’the most gratifying outcome for a bank in the era of the pandemic should not be closing a juicy commission-rich deal but saving a business from virus-triggered bankruptcy and its employees from being laid off’’. I cannot agree less.
Let us now chronicle some of the challenges that Nigerian banks are likely to confront in the wake of this crisis:
• Business loans, especially to small and medium enterprises, are at risk due to the forced shutdown. But entire industries such as travel, manufacturing, agriculture, hospitality, etc. will be hard hit, as they will have no way to make up for the lost revenues in the future. Banks in the country are, therefore, likely to witness a spike in their non-performing assets ratio;
• Regulators would want to know that boards are engaged, capital and liquidity standards are appropriate and risk management is effective;
• Clients (whether retail, commercial, corporate, or institutional) will want reassurance that their financial institutions are strong and stable — even if their own finances are under stress;
• Employees would want to know about their personal safety and about how their jobs may change;
• Cybersecurity: A considerable concern is the rise in cyberattacks and fraud, as consumers, businesses and employees adapt to this new environment. Crisis and rapid change always create an opportunity for bad actors, and COVID-19 will be no different. There can be additional vulnerabilities in the middle of a storm. This is because of significantly higher levels of remote access to data and core systems, and because employees and management could be more susceptible to social engineering efforts in the midst of a crisis;
• Workforce challenges—a major one;
• Tens of thousands of consumers are now being placed under quarantine or lockdown. As a result, they might lose their ability to pay for credit;
• Banks could face many more transactional requests, both from borrowers looking for forbearance and from would-be borrowers looking for a deal;
• Credit quality may deteriorate quickly in some areas, especially in sectors or geographies that are hit the hardest. This may overwhelm existing models for Current Expected Credit Losses (CECL), requiring more resources to assess the impact of changing market conditions. This could have an effect on stress-testing in general. This will also deepen the economic pain we already anticipate for 2020.
• Financing conditions may likewise sour as investors become more risk averse. This would hit bank credit;
• Markets may be highly volatile for some time, and that will make price discovery more challenging. Rapid liquidity shifts and unexpected demand drops are already causing some challenges for market participants that need to “see” pricing;
• Similarly, volatility and associated dislocations can limit the effectiveness of hedging relationships;
• In the coming years, consumers will fear infection. This will accelerate the switch to a cashless society and the adoption of alternative integrated payment features powered by mobile wallets. Personal mobile devices will become a user’s central operating device, enabling payments to peers and to businesses. Consumers will use mobile devices to operate ATMs and terminals remotely without touching the screen. Technology providers should be focusing on alternative authentication methods through biometrics.
How should Banks in Nigeria respond to the above developments?
The resilience of banks’ asset quality and capital adequacy in 2020 hinges in part on the success of the governments and regulator’s policy responses.
• Bank Directors should not take bonuses in 2020 – or next year either if the pandemic extends into 2021. Partly this comes back to banks presenting themselves this time as part of the solution and not of the problem;
• Banks should suspend dividends, even though receipt of these is a big reason for owning bank stocks. That would be one way to conserve capital for lending. It goes without saying that buybacks should also be off the table;
• Banks should postpone staff reductions. Cost cutting can wait;
• Banks should rein in risk taking as a means to boost earnings. Any activities liable to push a bank into new areas of risk – such as M&A and similar transactions which may make sense during more normal times – should be best avoided for a while Management time and effort, stretched to the extreme in these difficult times, are better spent steering bank’s activities to support and guide businesses and individuals impacted by the coronavirus;
• Banks must be aware of new types of attacks and fraud, particularly as more staff work from home and therefore open to new threat vectors. The risk of vital team members being sick or unavailable or less efficient because they are working from home will become a challenge. Some regulators, such as the Monetary Authority of Singapore, have already mandated split team arrangements. This means that different teams split so that if an infection cluster appears in one, the business unit can still carry on operating.
• Banks will definitely be required to make disclosure(s) about the effect of COVID-19 on their business within financial statements or other SEC filings. Affected disclosures could include risk factors, impairment, debt, liquidity,etc;
• Don’t let this crisis distract you from your compliance responsibilities, which in some ways are more important now than ever. Regulatory compliance efforts, such as maintaining capital levels, appropriate review, supervision and surveillance, and anomaly reporting, have to be key priorities.
• Identify at-risk segments and geographies. Banks may need to develop guidelines to address late and missed payments, even as you develop loss-mitigation strategies. In some cases, customers will need more formal assistance, or regulators may require banks to grant relief. So, banks may want to take steps now to develop criteria for assistance programs — and then develop and implement them;
• Strengthen your remote access management policy and procedures. Make sure working from home doesn’t mean working without security. It’s now possible to transition to rapid, secure, remote work models more quickly than ever before;
• Fortify your endpoint protection, and make sure devices and software are hardened and patched. You may need to restrict access to some physical facilities, in whole or in part, in advance — before they are exposed to the virus.
• Some employees may be exasperated when asked to work elsewhere. You may also find that some employees don’t have appropriate physical environments for remote work, or that your supervision and review processes aren’t adequate in those situations. In some cases, you may not have enough qualified employees to do the work that has to be done;
• Many of the largest banks have already triggered plans that would split teams into diverse locations on alternating schedules to diffuse the infection risk. We’ve seen efforts to limit office movement and remodel office space to increase the distance between workers. Some firms are going further, restricting or even banning contractors and other visitors. But no single firm seems to be applying a single method across the board.
• Workforce management:
• Be flexible with work arrangements as appropriate. If your videoconferencing or other network technologies [zooming] can’t handle the load, explore technology solutions that can;
• Establish risk mitigation programs for employees who may still need to work on-site. Be prepared for a spike in calls to customer care centers. You may need to redeploy staff, or scale up or down by using contingent workers. Automated systems can help, but your clients may most appreciate human empathy;
• Recognize that the current situation could be profoundly unsettling for many employees, some of whom may be dealing with medical issues, childcare challenges, family income disruption and more;
• Communicate clearly and concisely with employees about steps you’re taking to reduce stress while you plan. Banks should review their plan for employees absenteeism, to be sure it is appropriate for the current situation;
• Refine performance expectations. Account for a learning curve as you adapt to a change in work locations and processes, and anticipate a dip in productivity;
• Recalibrate employee incentives related to goals such as booking loans, client profitability or number of refinance transactions — keeping in mind that these goals must advance the firm’s overall objectives. For key roles, such as financial officers or loans officers, you may also need to reevaluate the design of your compensation planning; and
• Be careful that you don’t create incentives that may adversely affect customers and introduce risks to your reputation. Depending on your compensation planning cycle, consider delaying decision-making until the acute crisis has retroceded.
The scale of the task before everyone demands a huge cooperative effort with governments, central banks and other authorities, the private sector, charities and individuals, working together to limit the spread and provide care for those affected – whether directly or indirectly. We shall overcome.