One of the sectors that could be left reeling for some time after the COVID-19 pandemic is banking. As unemployment rises and businesses remain shut, the ability for these parties to meet their debt obligations drops.
Impact of the coronavirus on banks
With mass economic uncertainty, a lot of people are contracting their spending and bracing themselves for tough times ahead, with a recession looking inevitable now.
While the banking sector is nowhere near as exposed when compared to the Great Recession, it certainly has major concerns. A lot of leading banks had to borrow massive sums recently to shore up their balance sheets and concerns are growing that defaults on loans are going to rise drastically as unemployment teeters onwards and upwards.
Warren Buffett sold Berkshire Hathaway’s (NYSE: BRK.A)(NYSE: BRK.B) majority stake in Goldman Sachs (NYSE: GS), bringing its holdings down from 12 million shares to less than 2 million.
Here are a couple of other banking stocks to be careful of:
1. JPMorgan Chase
After eventually making it through the Great Recession in one piece, JPMorgan Chase (NYSE: JPM) went on a ten-year bull run to have one of the best stretches in its history. However, the tides are now turning, with profit falling dramatically to $2.9 billion in Q1, in comparison to the between $8 and $9 billion in profit it had been generating in previous quarters.
The pandemic is the main reason for this decline and it led to the bank setting aside $8.3 billion to cover potentially bad debts coming down the line. This is a massive sum and only compares to the $8.6 billion JPMorgan set aside during the Great Recession. These funds will help cover losses in Q2, with about 15% of the total loan portfolio for the bank being risky credit card debt.
Bad debts will only continue to rise and most aspects of the JPMorgan business will suffer. Its dividend has remained intact for now, but if they are cut in the future, this will no doubt lead to its share price dropping.
Its stock had hit an all-time high in February before steeply falling by almost 40% once the gravity of the virus started to unfold. With uncertain times ahead, the price is still not looking very enticing for investors.
2. Bank of America
Bank of America (NYSE: BAC) is the second-largest bank in the U.S. by market value. It has bad debts concerns, with 23% of its loan exposure being in at-risk industries. With these businesses struggling and many going bust, further pressure will come on Bank of America.
With dividends growing steadily in recent years, any action taken to alter these payouts will lead to downward pressure on the bank’s share price. Its aggressive share buy-back scheme has also been suspended for the moment.
It has made a lot of improvements as a company since being in dire straits during the Great Recession. The credit quality of its loan portfolio has improved a lot and the legacy issues from the last financial crisis have largely been dealt with. Its operational efficiency has also improved massively and its mobile banking division is growing rapidly. This segment increased 10% year-on-year, rising to almost 30 million digital customers by April 2020.
Bank of America’s Research Investment Committee is very bearish on the financial markets. It believes that there is a significant risk of a second wave of the virus, with this not being properly priced into the markets.
With unemployment only going to grow and struggles to repay debt only going to increase if this is the case, Bank of America shares still have some way to drop before hitting rock-bottom. Its price fell by over 43% following the spreading of this virus, with not much recovery seen since.
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Contributing Writer at MyWallSt
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.