Coronavirus to cost banks $2.1tr by the end of 2021, says S&P

Global banks face combined loan losses of $2.1 trillion by the end of 2021 as a result of the coronavirus crisis, credit ratings agency S&P Global estimates, with a hit of $1.3 trillion this year more than doubling the 2019 level.

Around 60% of the losses are likely to be in Asia-Pacific S&P said on Thursday, although the highest relative increases - at more than double on average compared with 2019 - will occur in North America and Western Europe.

“We estimate that the top 200 rated banks represent about two-thirds of global bank lending,” a group of S&P’s top analysts said in a new report.

“For 2020 we estimate that credit losses for these banks would absorb about 75% of their preprovision earnings. Under our base case, this ratio improves to about 40% in 2021.” Asia-Pacific is expected to account for $1.2 trillion of the losses in 2021, with three quarters of that from China.

In terms of customer loans, the Chinese banking system is approximately the same size as the US, Japanese, German, and British banking systems combined, and tends to play a more important role in the supply of credit to the economy.

North America’s regions are forecast to account for a further $366 billion of the increase, followed by $228 billion in Western Europe, $142 billion in Eastern European, the Middle East and Africa and $131 billion in Latin America. “Should the COVID-19 pandemic prove to be worse or last longer than S&P’s base case economic forecasts assume, then a combination of higher credit losses and lower earnings will inevitably hit banks across the world,” S&P’s report said.

Meanwhile, India’s embattled yes Bank, which was on the brink of collapse earlier this year, announced plans Thursday to raise up to 150 billion rupees ($2 billion) in a Mumbai stock listing.

The country’s fourth-largest lender was struggling with bad loans before the Reserve Bank of India took it over in March and drew up a rescue plan backed by eight other banks.

It will now look to bolster its balance sheet through the share offering from July 15 to 17, according to a stock exchange filing.

Liquidity worries have dogged India’s financial system for more than a year after the near-collapse of IL&FS, one of the nation’s biggest “shadow banks” -- finance houses responsible for significant consumer lending.

This has made banks reluctant to issue loans and further hindered Asia’s third-largest economy, which has been clobbered by a months-long lockdown brought on by the global coronavirus pandemic.

Separately, equity markets slid on Thursday after US data raised worries about the economy’s recovery and doused enthusiasm that drove a Chinese stock rally for an eighth straight day, while the dollar gained as new coronavirus cases hit another record.

The dollar had struggled earlier in the session, with China’s yuan climbing to a four-month peak, as investors poured into Chinese stocks on growing signs of a recovery that also helped lift copper prices to more than a year high.

But concerns about renewed US coronavirus lockdowns kept a lid on oil prices, too, and outweighed signs of a pick-up in US gasoline demand. A slowing rate of decline in weekly US jobless claims from a peak in March also gave investors pause.

Rising coronavirus cases and slower improvement in the US jobs market amounted to a one-two punch for the market.

The MSCI world equity index, which tracks shares in 49 nations, retreated after earlier gains. The index fell 0.8% after its broadest measure of Asia-Pacific shares outside Japan rose 0.66% on the China rally.

Wall Street also fell. The Dow Jones Industrial Average slid 1.58%, the S&P 500 lost 1.20% and the Nasdaq Composite dropped 0.51%.

In Europe, stocks pared gains to close lower. Europe’s broad FTSEurofirst 300 index dropped 0.78%.

More than 60,000 new coronavirus infections were reported on Wednesday and US deaths rose by more than 900 for a second straight day, the highest since early June.

Jobless claims have been gradually falling, though they remained roughly double their highest point during the 2007-09 Great Recession.

Initial claims for state unemployment benefits totalled a seasonally adjusted 1.314 million for the week ended July 4, down from 1.413 million the prior week, the labour Department said.

Oil prices fell about 3% as investors worried that renewed US lockdowns to contain the spread of coronavirus would sap fuel consumption.

Brent crude futures fell 0.79% at $42.5 a barrel. US crude slid 2.79% at $39.76 a barrel.

Overnight in Asia, Chinese stocks set their longest winning streak in two years, and the yuan had strengthened past 7%, despite rising tension over Hong Kong and the economic uncertainty caused by COVID-19.

It was the Shenzhen blue-chip index’s eighth straight day of gains, adding another 1.5% to its 16% surge this month, and it helped Europe initially on an upward trajectory after hesitation caused by uninspiring German data.

Improving risk sentiment was the dollar’s earlier downward momentum — it was at a one-month low against the euro, a three-week low versus the British pound and a four-month trough against the Swiss franc before rebounding.

Agencies