July 9, 2020
EXCERPT: Banks and Credit Unions have seen a drop in lending and a surge in deposits as economic uncertainty continues amidst the coronavirus pandemic. Adding short-term, higher-quality consumer loans that have some yield to them should be the next step for financial institutions.
Consumers are stashing their cash amidst the current health crisis and economic uncertainty.
It should come as no surprise that consumers and small businesses are more focused on storing their cash instead of growing their wealth or starting new projects thanks to the economic uncertainty that has stemmed from the current health crisis. In turn, banks are seeing a surge in deposits and a cut back in lending, according to recent data from the Federal Reserve.
Meanwhile, consumers and small businesses that are looking to take out a loan are finding it more difficult as banks tighten their lending standards to hedge against risk. Banks are being even more conservative with consumers who are not existing clients.
Loans Drop as Deposits Spike Due to Economic Uncertainty
According to May's figures, commercial and industrial loans spiked year-over-year over the past three months, predominantly because businesses have been tapping into their lines of credit. But consumer loans have dropped significantly by 24.7 percent in May following a decline of 41.7 percent in April. Credit cards and residential real estate loans have dipped as well.
Meanwhile, deposits soared by $865 billion in April and again by $604 billion in May for banks, adding to the $1.85 trillion in deposits over Q1 2020. And credit unions posted an increase of 4.7 percent in saving balances in April, while loans ticked up by a mere 0.1 percent, according to CUNA Mutual Group's Credit Union Trends Report.
Lending is down as small businesses and consumers shift their focus to protecting their money rather than growing it.
Banks and credit unions are now having a tough time turning these extra deposits into interest-earning assets while keeping deposit costs down in order to show a profit. This is a bad sign for the banking sector, particularly after profits dropped 70 percent over the first quarter.
According to the Federal Deposit Insurance Corporation (FDIC), the current economic situation has caused lenders to write off 15 percent more delinquent debt compared to the same time the year before. Further, $38.8 billion has been put aside to cover potential loan losses, marking a whopping 280 percent jump from the previous year.
Over half of banks reported a decrease in profits, with 7.3 percent of lenders having an unprofitable first quarter.
Banks don't yet have a full picture of losses just yet and are being incredibly cautious when it comes to new business and acquiring new clients.
The Coronavirus pandemic completely changed the landscape for banks and credit unions who were lending to a high degree, but are now left being flush with cash after the virus took hold of the nation in March. Now, financial institutions need to figure out how to earn money off of soaring deposits while also hedging against risk, which can be a real challenge after seeing loans plummet.
Banks and Credit Unions Encouraged to Revamp Their Loan Portfolios
As deposits spike and lending dips, losses are up, and income is down for many banks and credit unions. In an effort to boost profitability and minimize risk, banks and credit unions can add short-term, higher-quality consumer loan assets to the books that have some yield to them. Fortunately, Garnet Capital has many different pools of this type of asset available.
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