In a report on the impact of COVID-19 on banks, the European Banking Authority (the EBA) said that COVID-19 may encourage many customers to become digital customers. They also say that the new environment might increase clients’ willingness to switch from banks to fintech competitors.
Overall in the report, the EBA says that banks entered the COVID-19 crisis with strong capital and liquidity reserves, but there are a number of challenges ahead as we move through the crisis and emerge from it. These challenges include: 1) fintech competition and increased digitisation, 2) increasing non-performing loans, and 3) low interest rates continuing for a longer period resulting in a low interest margin for a longer period and so lower profitability for banks for a longer period.
In the report, the EBA notes that employees are starting to return to offices, which will help operationally. But it says that COVID-19 “might be the catalyst for many clients to become digital customers”. It also says that COVID-19 might “amplify clients’ preparedness to switch to fintech competitors”.
The EBA notes that banks came into this crisis during a period of low profitability. They note that almost half of banks were not covering their cost of equity at the end of last year. With profitability levels low because of low interest margins and difficulties in reducing costs. The report says that this low interest margin issue for banks might increase with low interest rates now expected for longer as a result of this crisis.
The report also states that banks in the EU have increased their portfolio sizes for small and medium enterprise (SME) loans and consumer loans. We expect to see higher non-performing-loans (NPLs) because of the break in economic activity during the COVID-19 shutdown and the lower level of economic activity expected going forward. The EBA notes that loan moratoria might delay when NPLs are recognised and reported.
Solid Capital and Liquidity
The EBA notes that banks overall in the EU came into the COVID-19 crisis with strong capital and liquidity metrics. Banks came into the crisis with strong capital adequacy ratio levels. Banks’ capital levels were on average 5% above their overall capital requirements (OCRs). Banks’ liquidity ratios were approximately 150%.
The report also notes that banks were able to continue running operationally during the shutdown by activating their contingency plans. The report notes that contingency plans were insufficient in some cases for some banks’ units in offshore locations.
You can find the full report here.