Deloitte: How to navigate the financial sector post COVID
Experts from Deloitte Centre for Financial Services explore how leaders in financial services can find the right path forward following the global COVID-19 pandemic.
Deloitte looks at how COVID-19 may have similarities to the 2007-09 financial crisis but point out the implication for the future performance of financial firms are likely to be different.
The consultation report, The path ahead, takes a methodical look at eight financial sectors from the housing market, insurance to banking and commercial. “This series explores the pandemic’s financial impacts on specific financial services industry sectors to help leaders find the right path forward,” commented Deloitte.
Highlights from the comprehensive report include:
- Forecasting the performance of the US banking industry
The first two quarters of 2020 provided a glimpse of the potential damage lying ahead, report Deloitte. The US banking industry provisioned a total of US$52.7 billion for loan losses in the first quarter and the second quarter, probably looking even worse.
“By the end of March, barely two weeks into the lockdown, the United States hit record levels of unemployment, the highest since the Great Depression, commented Deloitte.
Three scenarios outlined in the report include:
Baseline (70% probability) - recovery will not really get underway until the middle of 2021. GDP plunges 12.4% in 2020 and 4% in 2021, followed by a strong recovery in 2022–23.
No end in sight (25% probability) - the economy experiences repeated cycles of starts and closings. GDP drops in a similar range as the baseline scenario in 2020 and 202 but sees slower recovery in 2022.
Fast bounce back (5% probability) - reopening the economy beginning in May proves successful. GDP declines 11.6% in 2020, followed by a recovery starting in 2021, and then explosive growth in 2022.
“In our baseline scenario, US commercial banks could face net loan losses of as much as US$387 billion from 2020 to 2022. As a result, RoE could decline to 2.3% in 2020,” comment Deloitte.
Deloitte recommend key action points banking leaders should consider as they navigate the current crisis:
- Think big. Extraordinary times call for bold ideas
- Create a resilient foundation
- Transform business models to absorb future shocks better
- Aim for scale
- Embrace digital migration
- Focus on structural cost transformation
- Explore strategies for consolidation
- Reimagine the role of branches
- Realise the future of work is here
- Reimagine capital optimisation
- Impact on mortgages and the housing market
Think long-term but take actions in the short term. “These are trying times for mortgage servicers, but the issues are not completely new. Here are some important lessons from the 2008–09 financial crisis that could help servicers recover and eventually thrive,” advises Deloitte.
Be more proactive
- Anticipate needs, then communicate clear advice to distressed customers
- Focus on identifying stress early to allow time to put effective solutions in place
Be more agile
- Adopt an iterative approach to enhance processes put in place to improve efficiency and reduce risk
- Focus on transferrable skills and engage third parties
Be more digital
- Utilise data-driven models to identify which borrowers are most likely to face financial difficulties
- Rapidly deploy digital/cloud-based servicing technology solutions and enhance analytical capabilities
- Impact on workers’ compensation
Workers’ compensation insurance premiums are largely driven by insurable exposures - that is, how many people are employed.
“Our analysis indicates that millions of layoffs and furloughs during the COVID-19 outbreak could prompt a drop in volume of nearly 20% in the second quarter of 2020,” comment Deloitte.
Here are some actions insurance carriers can take now to help mitigate risk, protect their brands, and respond to market shifts:
- Practice prudence in underwriting
- Align to the “new normal”
- Accelerate claims efficiency
- Manage reputational risk
- Impact on homeowners’ insurance premiums
“While the COVID-19 outbreak and the ensuing economic slowdown may have kept tens of millions in their houses for months either working, sheltering or both, our analysis indicates that homeowners’ insurance will likely be one of the few lines that may not see any substantial long-term negative impact on premiums due to the pandemic,” report Deloitte.
- Impact on office property owners and operators
Office owners and operators are at an important stage for re-occupancy of their spaces. “In the near term, landlords should make spaces ready for re-entry and stay focused on preserving existing tenant relationships and liquidity.
Among the immediate priorities, landlords should consider:
- Using smart building technologies
- Collaborating with tenants
- Managing liquidity and financing in the near term
- Impact on personal and commercial auto insurance
According to Deloitte, with people driving a lot less due to the pandemic, personal and commercial auto insurance carriers should expect to see a steady decline in premiums. But given the lower traffic density, profitability could get a boost since fewer accidents would likely result in fewer claims.
“Our baseline forecasting scenario suggests that a combination of factors prompted by the pandemic could result in a decline of 6.2% in personal auto insurance premiums written, and 3.5% for commercial auto in 2020.”
- Impact on US banks’ commercial real estate loan portfolios
Deloitte report there are signs of distress in the US commercial real estate (CRE) market. New distressed CRE assets per quarter reached $30.4 billion in Q2 2020, a fivefold jump from $6.2 billion in Q1 2020, and just shy of the peak of $35.5 billion hit in Q4 2009 during the 2008–09 global financial crisis (GFC).
“With continuing uncertainty, banks should continue to identify and proactively manage their exposure to at-risk properties that demand immediate attention.”
- Impact on proptechs
“Our research revealed a growing dichotomy between recent proptech funding and performance,” said Deloitte.
“Many co-sharing proptechs and start-ups were significantly hit by the pandemic… Coworking companies experienced negative rental impacts as some of their primary sources of income came from freelancers, start-ups and small businesses, which were adversely affected by the government-led economic shutdowns.
“However, during 2Q 2020, a large proportion of funding was directed toward co-sharing spaces, which raised U$1.2 billion, signifying continued investor confidence.”