The banking sector has successfully navigated the immediate pressures of the COVID-19 crisis. As thoughts turn to a world beyond the immediate crisis, a strong banking sector will be needed for a strong recovery. In a low interest rate, low profitability world, where the risk of a “second wave” remains, banks will need to focus on customer needs, while driving efficiency and building resilience.
As the initial crisis measures to respond to the COVID-19 pandemic begin to slowly ease, financial institutions are starting to examine lessons learned from how they have adapted their operations in recent months. Many banking employees made a success of working from home during lockdown, with technology sustaining critical business activities from trading through to financial advice services.
Moreover, the banking industry continues to fill an enormous credit gap: offering forbearance and giving customers greater access to loan facilities. The banking sector has also played a crucial role in distributing various governments’ fiscal packages.
However, further challenges lie ahead. The global economy is facing extreme hardship with widespread unemployment – the jobless rate in the US stood at 11% in July 2020 – soaring government deficits and businesses struggling to survive.
Banks are experiencing a growing tension between supporting their customers and increased concerns about the rise in non-performing loans (NPL), which will lead to capital depletion. Three major US banks recently reported that they put aside a total of $25b in loan loss provisions in Q2 2020.1
While joint action with governments and regulators is likely to be required to address the immediate NPL overhang, the repercussions for businesses and individuals are expected to be longer lasting.
The EY Future Consumer Index shows that nearly a quarter of respondents think it will take years to regain the level of financial security they had before the crisis. This points to the challenge many businesses may face with consumers saying it will be years before they feel comfortable going to sporting events, the theater, or flying.
With some countries gradually opening up but others contending with fresh outbreaks, how consumers react to these changing scenarios will correlate directly to global economic activity.
Looking beyond the immediate threat and ongoing effects of the COVID-19 pandemic is difficult. However, it’s necessary for banks to continue playing a significant role in shaping the recovery and helping their customers rebuild their financial security and business health.
This will require banks to refocus on really understanding their customers’ needs, and in parallel, adapting their operating models to ensure the best efficiency and resiliency measures, to help them weather the recovery.
Looking ahead, there are three areas of focus that will reshape the sector and support a stronger recovery: serving customers better, through the right channels, with dynamic and relevant products and services; adapting to new ways of working; and building more resilient and agile organizations.