Highlights on Covid-19 impacts on Banking Sector
The COVID-19 pandemic has had a massive impact on the global economy and has generated significant instability and high volatility in global capital markets. The impact COVID-19 has had on the banking sector consists of three aspects: short-term, long-term, and systemic risks. Support for differentiated financial services were needed. Medium-to-small enterprises need to be supported through special credit lines, reduced interest rates on loans, deferred repayments, and establishment of long-term credit systems. Digital transformation needs to take place at a faster rate to improve intelligent risk control systems. The COVID-19 outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is changing quickly with widespread impacts.
As the economic fallout spreads, banks find themselves juggling some big priorities that require concrete steps to reposition now while also recalibrating for the future. They’re working to keep their distribution channels open, despite social distancing advice and supervisory and compliance functions that were never designed for remote work. They’re trying to manage revenue and customer expectations, despite near-zero interest rates and growing pressure on consumers. And, they need to keep an eye on strategy and brand issues that will define their future, as market forces and customer behaviors potentially change coming out of this crisis. It’s a tall order. But there are plenty of concrete steps banks can take to support the communities and customers they serve while balancing medium to long term positioning.
While the full impact is yet to be determined, it’s expected that the adverse impact is likely to continue from the virus’ knock-on effects. The areas that are likely to be most impacted by COVID-19 are profitability and credit management/cost of risk. The low interest rate scenario, along with the significant impact of the COVID-19, is reducing the core banking profitability in mature markets. Financial institutions are thus shifting towards commission-based income from the likes of payments and tech businesses. One of the immediate effects on the real economy is the increased credit risk of corporate and retail clients of the banks. In order to continue financing the real economy and support its recovery, banks should distinguish between purely temporary phenomena, destined to be reabsorbed in a short time, and longer lasting impacts which would require actions of management and reclassification. The contraction in economic activity is having adverse consequences on credit quality as banks are increasing loan loss provisions. Many banks, have already posted significant losses in Q1’20 (Jan-Mar) to face a potential surge in bad loans.
The COVID-19 impact on the banking system and on the bank -customer relationship can also be defined as a ‘positive discontinuity’ for the purpose of digitization of the sector and the ability to offer an excellent customer experience. Banks, even the most territorial and branch-centric ones, are forced to encourage the use of channels that have never been their strategic priority. This phase would be particularly complex; which banks need to address by demonstrating real proximity with their customers. The clear understanding by banking operators of their gap in the provision of services, becoming more tangible than ever before with COVID-19, could make them even more inclined to accelerate the digital transformation path through partnerships and collaborations within the fin tech community.
How does the crisis affect banks?
Short to medium-term impacts of the crisis: First, firms that have stopped working miss out on revenues, and therefore might not be able to repay loans. Similarly, households with members who have lost their jobs or are furloughed have less income, and therefore might not be able to repay their loans. This will result not only in lost revenue but also in losses (if repayment capacity is permanently impaired), negatively affecting profits and bank capital. And as a swift recovery becomes less likely, banks can expect further losses, resulting in the need for additional provisions, further undermining their profitability and capital position. Second, banks face increasing demand for credit, as especially firms require additional cash flow to meet their costs even in times of no or reduced revenues. In some cases, this higher demand has presented itself in the drawdown of credit lines by borrowers. Third, banks face lower non-interest revenues, as there is lower demand for their different services. For example, there are fewer payments and transactions to be done with lower economic activity. Fourth, Losses and lower capital buffers in banks can have negative spillover effects, which might make banks’ solvency position even worse and might also undermine the broader economy.
Long-term impacts of the crisis:
It is a little too early to make clear predictions about the likely long-run effects of the Covid-19 recession on the banking system, but there are some trends that are already clear: First, low interest rates, close to zero or even negative, are here to stay for much longer. This will certainly put further pressure on banks’ profitability. Second, the trend towards digitalization might increase even further, as social distancing might become the new norm, and personal interactions between bank and client carry even higher costs. This might imply the closure of further branches and stronger reliance on telephone and internet banking. Third, the crisis will further strengthen competition for banks from ‘fin tech’ (financial technology companies) and especially Big Tech companies, such as Alibaba, Facebook, Google, Apple and Amazon. These large platform providers are likely to come out of the crisis further strengthened, with a large cash pile and in a strong position to expand into financial service provision. This might put additional competitive pressure on banks in their core business lines. These three trends started before the pandemic but they might accelerate due to the crisis. Consequently, we might see further competitive pressures on banks, thus requiring an innovative reaction by them.
________________________________________________________________
Based on your understanding of aforesaid highlights, you should answer the following four questions:
Q1. Critically discuss the key important factors and forces in the general and industry environments that affect the banking industry in MENA region. (30 marks-631words)
Q2. Discuss how the pandemic COVID-19 affected environment factors and forces and consequently the banking industry in MENA region. Illustrate, your discussion by choosing a bank from MENA region. From your own perspective, what actions your chosen bank should take to keep its competition alive if this situation prevailed? (20 marks-331 words)
Q3. What are the key resources available for the chosen bank to effectively and successfully compete within its boundary and attain a competitive advantage? Discuss whether chosen bank position is supported by its value chain and other internal resources. Identify problems you think they faced in respect to COVID-19 pandemic situation. (30 marks- 632 words)
Q4. Critically discuss the chosen bank Business–Level strategy components (i.e. the merits and demerits of these components). Suggest recovery steps by which may help your chosen bank to improve and sustain its competitive position for future. (20 marks- 331 words)
