WASHINGTON – The blasting sector will remain under pressure until 2025 as the economy matures, the International Monetary Fund said Friday.
In its latest “Global Financial Stability Report,” the IMF found that banks across nine advanced economies will struggle to generate profits over the next five years as the coronavirus pandemic brings a long period of low interest rates. The fund said the Covid-19’s economic downturn would “test the stability of banks”; as they face loan losses and lighter margins from low interest rates.
“The underlying constraints on profitability are likely to continue in the medium and long term even once the global economy begins to recover from the current shock,” the IMF said.
Banks’ earnings have already hit strong with the economic shock of the pandemic. JPMorgan Chase, for example, reported a 69% decrease in revenue for the first quarter compared to a year earlier. The KBW Bank Index, which tracks two dozen bank stocks in the United States, has fallen 39% year to date.
“Banks’ income challenges appear before the recent episode of Covid-19 and will expand by at least 2025, which is more than the immediate effects of the current situation,” the IMF said.
The report said banks were better prepared for economic shock thanks to buffers put in place since the financial crisis, but some policy makers say more needs to be done to protect households and business.
“Banks are entering into this crisis with a lot of capital and liquidity,” Tobias Adrian, IMF’s financial advisor, told CNBC. “Having said that, this is a very, very difficult economic crisis.”
One solution, say policy makers, is for banks to stop issuing dividends and stock buybacks to maintain capital. U.S. banks agreed in March to suspend purchases in the second quarter of the year, but many still pay dividends.
“By stopping payouts, it helps to create additional pillows against additional bad ones,” Adrian said. “If all goes well this is capital that can be paid in the future to shareholders.”