Bankers Expect Recession Into 2021

Even as states begin to lift stay-at-home orders in hopes of jump-starting their sagging economies, many banking executives are bracing for a prolonged slowdown that could last at least into the first quarter of next year.

Banks are now considering a number of belt-tightening steps that include freezing salaries and delaying investments in technology and product development, according to survey of executives by Promontory Interfinancial Network.

The survey results provide a snapshot of how community banks are responding to the coronavirus pandemic and how executives see federal and state efforts to contain its spread playing out over the next several quarters.

Roughly 81% of those surveyed said the economy was worse at the end of the first quarter than it was 12 months prior.  This is compared to 12% who reported such a decline when asked at the end of last year.  “It fell quite dramatically, through the floor almost,” said Paul Weinstein, a senior policy adviser for Promontory.

The outlook for the year ahead is bleak as well. Three in four executives surveyed expect the economy to sour further, with barely one in 10 expecting the economy to improve by the end of next year’s first quarter.

Banking executives report that the race for deposits has also cooled off.  Workers fear their job security and are socking away more savings while businesses have drawn down their lines of credit and are holding that money in their accounts.

Deposits at commercial banks made an unprecedented jump from $13.2 trillion at the start of the year to roughly $15.1 trillion at the end of April, according to Federal Reserve data.

About 20% of executives reported stronger competition for deposits in the first quarter, down from 55% at the end of last year and 86% at the end of 2018, according to the survey.

With their banks flush with deposits, about 83% of executives said that funding costs had declined from one year ago, and 30% reported a “significant decrease,” according to Promontory.

Many banks have seen loan demand increase in recent months as companies drew down credit lines or sought emergency relief through the Small Business Administration’s Paycheck Protection Program.  Nearly 75% of executives surveyed said that their banks have offered emergency loans to customers whose finances have been upended by the pandemic. Nearly all those surveyed said they have offered some sort of loan mitigation to existing borrowers.

Looking ahead, nearly 50% of executives expect loan demand to fall through March 2021, according to the survey, with the rest split over whether demand will stay the same or increase some.

Additionally, most banks have put their own plans on hold. Over 65% of the executives surveyed said that as the U.S. heads into a recession, they plan to delay the development or rollout of new products and services, and roughly half are freezing salaries.

Source: American Banker