Business_news Banks may not be profitable until 2025 even as major economies recover, new IMF report says

Business_news

Reuters

  • Bank profitability will be challenged until at least 2025 as past obstacles and pandemic risks stifle earnings, theInternational Monetary Fundsaid Friday.
  • Major US firmsdiverted tens of billions of dollars to their loan-loss provisionsin the first Quarter, trading profits for default protections as the economy plunged into a recession.
  • Banks had already used cost-cutting and fee increases to make up for slowly declining earnings, but those tools aren’t as effective anymore and could prompt companies to take new risks to lift earnings, the IMF said.
  • The organization called on financial sector authorities to prepare for industry-wide risk-taking, whether through stricter stress testing or supervisory capital planning.
  • Visit the business Insider homepage for more stories.

Banks will struggle to protect profits for the next five years as the coronavirus fuels loan losses and keeps interest rates at historic lows, theInternational Monetary Fundsaid Friday.

Profitability hurdles plagued banks well before the coronavirus pandemic, the IMF wrote in a report. Fee income trended lower from 2013 to 2018, and new competition from robo-advisers and other tech players sapped client capital.

Firms were forced to hike fees and slash operating expenses to keep profits intact, but their earnings boosters face new tests from the pandemic and resulting recession.

“Banks’ earnings challenges emerged prior to the recent COVID-19 episode and will extend to at least 2025, well beyond the immediate effects of the current situation,” the IMF said.

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Most major US banks reported major profit slumps in the first quarter asa greater share of revenue was diverted to loan-loss provisions. The $2 trillion CARES Act opened the door for a wave of emergency lending, and banks taking on debt stashed tens of billions of dollars for potential defaults. Yet once the virus threat fades, a combination of low interest rates and heightened loan risk will slow their return to past earnings strength, the IMF said.

“Underlying profitability pressures are likely to persist over the medium- and longer-term even once the global economy begins to recover from the current shock,” the organization added.

The IMF also warned banks against taking on greater risk to accelerate profit growth. Medium-term earnings pressures could lead firms to boost credit, liquidity, or trading risks to outperform their peers.

Financial sector authorities should prepare for such actions and adjust stress testing accordingly, the IMF said, as a broad shift toward risky bank behavior could create systemic problems just as economies recover.

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