Profitability Decline and Credit Risk... Global Bank Stocks Continue to Plunge

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The spread of the novel coronavirus infection (COVID-19) is fueling a plunge in global bank stock prices. This is because central banks have significantly lowered benchmark interest rates in response to COVID-19, greatly increasing the likelihood of deteriorating profitability for banks. Additionally, credit concerns have intensified over households and companies facing difficulties in raising funds and potentially failing to repay loans, further heightening worries about bank earnings.

On the 16th (local time), the KBW Bank Index, which aggregates bank stock prices on the US Nasdaq, fell 16.2% from the previous trading day to 62.47. This is the lowest level in about four years since January 2016. The KBW Bank Index, which had maintained a level above 100 since October last year, began a sharp decline after the 20th of last month. As expectations grew that central banks would cut interest rates, concerns over worsening profitability increased, causing bank stocks to take a hit. The KBW Index, which was 104.17 as of the 24th of last month, has dropped more than 40% in the past month following benchmark rate cuts by the US Federal Reserve (Fed) and other central banks.

On the same day, the Dow Jones Industrial Average fell more than 12%, but the decline in major US bank stocks was even greater. Citigroup’s stock price dropped 19%, while Bank of America and JP Morgan Chase also plunged more than 15% each. Bank stocks also fell nearly 20% in Europe and Asia. In particular, Europe is experiencing a prolonged period of profitability deterioration due to the central bank’s negative interest rate policy, resulting in even greater damage.

Frederick Cannon, a KBW analyst, pointed out, "It is a very difficult environment for banks due to the decline in net interest margin (NIM) caused by low interest rates and increased credit costs." KBW forecasted that assuming the Fed maintains the current near-zero benchmark interest rate, bond yields turn negative, and the economic situation worsens, the earnings per share of major banks next year could fall to about one-third of previous estimates.

The default risk on loans held by banks has also increased due to the impact of COVID-19. As companies and individuals facing liquidity deterioration rush to delay loan repayments or request larger loans, concerns over non-performing loans are growing. Credit rating agency Moody’s said it is considering lowering credit ratings and issuing a negative outlook on banks in light of these factors.

However, experts believe that banks are not currently in a situation where credit tightening will immediately trigger a financial crisis. Foreign media reported that central banks have secured liquidity for commercial banks through measures such as benchmark rate cuts, and banks still have capacity due to stress tests strengthened after the global financial crisis. The day before, major Wall Street banks such as JP Morgan announced that they would halt share buybacks that could boost stock prices and instead use their funds for loans to individuals and companies economically impacted by COVID-19.

This content was produced with the assistance of AI translation services.