Global investment banks to post modest profits in 2020 despite Covid-19 impact

Lenders have extensively rebuilt and extended their capital buffers following the 2007-08 financial crisis, Moody’s says

The logo for Goldman Sachs appears above a trading post on the floor of the New York Stock Exchange. Moody's said US investment banks like Citigroup, Goldman Sachs and Morgan Stanley "are likely to suffer a more substantial hit to profitability" because of Covid-19 compared to their peers in Europe. April 15, 2020. AP
The logo for Goldman Sachs appears above a trading post on the floor of the New York Stock Exchange. Moody's said US investment banks like Citigroup, Goldman Sachs and Morgan Stanley "are likely to suffer a more substantial hit to profitability" because of Covid-19 compared to their peers in Europe. April 15, 2020. AP

Global investment banks (GIBs) are likely to post modest profits in 2020 despite falling revenues and higher provisions due to Covid-19, according to Moody’s Investors Service.

"Despite the severe effects of the crisis assumed under our revenue shock scenario, the GIBs as a group would still record modest profitability for 2020 – allowing them to maintain solid capital buffers at or above the levels reported at the end of 2019," said Ana Arsov, managing director, financial institutions group at Moody’s.

"As a group, the GIBs have extensively rebuilt and extended their capital buffers following the 2007-08 financial crisis,” she added.

The coronavirus pandemic which has infected more than 2 million worldwide and killed over 137,000 people, has derailed the global economy and brought trade and the travel industry to a virtual standstill. The global economy is set to contract 3 per cent this year as it slides into the deepest recession since the Great Depression of 1930s, according to the International Monetary Fund. At least $17 trillion have been wiped off from stock markets globally.

Underpinning Moody's assessment is a review it did of the GIBs' potential revenue drop in their capital markets, investment banking, asset and wealth management businesses, as well as to a reduction in interest rates and substantially higher provisioning charges and marks in their leveraged loan pipelines.

The ratings agency said many of the GIBs have taken significant steps to maintain their capital positions in the early days of this coronavirus-created disruption.

"Since many of the banks have already meaningfully cut or cancelled their dividends and suspended their share repurchase programs in response to the coronavirus crisis and the regulators' requests, their capital ratios will additionally benefit from greater capital retention in 2020," Ms Arsov added.

Banks with a greater reliance on revenue from capital markets operations as well as asset and wealth management income streams face deeper revenue losses than more universally-oriented, diversified banks, according to Moody's.

Banks with the smallest proportional declines in profitability are generally European GIBs – such as Barclays, BNP Paribas, Credit Suisse and Société Générale – "in part because they begin from a lower starting point,” Moody’s said.

However, the ratings agency said the European banks' counterparts in the US such as Citigroup, Goldman Sachs and Morgan Stanley – "are likely to suffer a more substantial hit to profitability but begin from a higher starting point because of the strong results they posted in prior periods.”

The prevailing environment will be further exacerbated by low interest rates worldwide, which will affect the US GIBs the most, after the Federal Reserve lowered its key interest rate by 150 basis points in 2020 to date, much deeper in Europe, the ratings agency said.

Banks more exposed to unsecured consumer lending, including credit cards, could experience a more immediate sharp increase in loan losses, it added. .

"Under our scenario analysis, Citibank would be the most affected, projected loan losses would absorb almost 100 per cent of the group's 2019 pretax earnings," Moody's said.

Updated: April 16, 2020 04:51 PM

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