Despite the economic tumult created by the COVID-19 pandemic, the nation”™s banking system is maintaining a state of stability and resiliency, according to a new study issued by Kroll Bond Rating Agency (KBRA).
“Solid financial metrics provide a strong starting point going into this economically uncertain period,” the report stated. “Profitability and capitalization remain sound, while problem loans have hovered around multiyear lows.”
KBRA observed that while the nation”™s major banks “are exposed to a potential broad-based impact in which consumer and commercial confidence is negatively affected and the economy slows meaningfully,” they will still be able to weather a pandemic-disrupted economy.
“Under this scenario, problem loans could grow considerably from a very low base yet remain manageable in the context of core earnings, reserves, and capital,” the report continued. “Importantly, tangible common equity levels are managed at much higher levels than before the 2008 financial crisis.”
KBRA pointed out that the credit profiles of the major banks are “materially stronger than in the past.” And while their profitability “will likely diminish in the near term” due to reduced capital markets activities and rising asset quality problems, their “capital and liquidity positions are expected to remain comfortable.”
If the pandemic creates a prolonged economic slowdown, KBRA forecasted “potential problems would remain manageable in the context of earnings power, reserves, and capital” even with loan quality deterioration.
The secret to this state of health, KBRA concluded, was the ability not to repeat the mistakes that fueled the Great Recession.
“Financial fundamentals in the U.S. banking industry have changed for the better since the 2008 financial crisis, catalyzed by regulatory and policymaker initiatives, more effective market discipline, and ”˜lessons learned”™ by more experienced and conservative bank management teams,” the report concluded. “Liquidity is more prudently managed and community/regional banks typically benefit from high levels of stable core depository funding supplemented by generally ample capacity to borrow from the Federal Home Loan Banks in the event of need.”
