By Promontory Interfinancial Network
What a difference three months make. In the fourth quarter of 2019, the outlook among bankers about the economy and the state of the industry was solidly positive. But as a result of the COVID-19 pandemic and the uncertainty it has created, the view among bankers has sharply shifted direction, becoming markedly more pessimistic about the economy with a sizable number concerned about access to capital during the coming year.
Bankers did see some positive signs, however. Funding costs have decreased as banks witnessed a massive influx of deposits in the first quarter. Competition for deposits has also declined as domestic deposits surged by more than $1 trillion during the first quarter.
Promontory Interfinancial Network’s proprietary Bank Confidence IndexSM (a composite of access to capital, loan demand, funding costs, and deposit competition for the 12 months ahead) measured 49.2, a decline of 3.7 points from the previous quarter.
And, while Promontory Interfinancial Network’s proprietary Bank Experience IndexSM (a composite of access to capital, loan demand, funding costs, and deposit competition compared to 12 months prior) reached a high of 53.0, a figure not seen since the third quarter of 2016, that number can be expected to decline in future surveys as it historically lags behind the Bank Confidence Index.
The shift towards a more negative outlook was even more pronounced in how respondents viewed overall economic conditions. More than eight in 10 (81%) said that overall economic conditions for their bank were worse at the end of the most recent quarter than they were 12 months prior—reflecting a 70-point jump from the prior quarter and up 64% from the first quarter of 2019. Only 5% believed economic conditions had improved in the previous 12 months.
Looking to the future, three-quarters of respondents (75%) expected overall economic conditions to worsen through March of 2021. That represented a 59-point rise from the previous quarter and a 40-point increase from the same time a year before. Eleven percent predicted economic conditions to be the same for the 12 months ahead, and only 14% anticipated improvement.
Banking during COVID-19
Topical questions this quarter focused on how the pandemic outbreak and resulting economic slowdown are expected to affect business conditions. The majority of bankers reported they would help their customers by offering loan mitigation (97%) and redirecting customers to electronic banking services (90%). Nearly three out of four (74%) said their banks were offering emergency loans to affected customers and businesses.
To help reduce the spread of COVID-19 and protect employees, more than eight in 10 respondents (86%) provided employees with technology resources for remote work, and 63% said they were requiring employees to work from home. In addition, more than three-quarters (78%) have closed branches or limited hours.
Responding to the U.S. economy’s move toward recession, more than six in 10 of those surveyed (63%) said their banks would consider delaying the development or rollout of new products and services, while slightly more than half (52%) indicated they would consider freezing salaries. Twenty-two percent reported they would furlough employees, and 15% expected to close branches.
In terms of how the Federal Reserve and regulators are handling the crisis, two-thirds of bankers (67%) thought it unlikely that the Fed would introduce negative interest rates, while nearly one in four (24%) believed it somewhat or very likely. Meanwhile, 65% reported the guidance regulators are providing to banks is sufficient, while 35% indicated they need more information on how to handle customers and operations.
Other Highlights
- Deposit Competition. The percentage of bankers who see deposit competition increasing through March 2021 is 34%. That is down 38 points from the first quarter of 2019 (72%).
- Funding Costs. This quarter, more than eight in 10 (83%) noted their bank’s funding costs had decreased compared to 12 months prior, with 30% seeing a significant decrease.
- Loan Demand. More bank respondents saw a decrease in loan demand this quarter (42%) than in the fourth quarter of 2019 (25%).
- Access to Capital. Sixty-eight percent said their bank’s access to capital remained steady over the previous 12 months, a decline of nine points from the prior survey.
By Promontory Interfinancial Network
