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Banking...Still at The Crossroads?

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Sep 01, 2020

Consumer spending is down. Profits and margins are near all-time lows. What should banks do?

Consumer Spending and the Economy

Consumer spending is the primary driver of the U.S. economy so last week's Commerce Department report showing consumer spending rising by 1.9% in July, the third successive month of growth, was a bright spot as the country works to get past the pandemic which has stunted performance and kept nearly 27 million people jobless. However, this report arrives amid an uncertain economic outlook, with many businesses still struggling, high unemployment and no clear picture of when the health crisis will subside to provide businesses and consumers the confidence to hire and return to normal spend levels again. Meanwhile the $600-a-week federal unemployment benefit expired weeks ago leaving millions without a critical source of income.

JPMorgan Chase has released tracking data demonstrating direct correlation of credit and debit card spending declining a bit in states with high unemployment as compared to states with lower unemployment. And, after reviewing spending patterns of the bank’s 30 million card holders going back to early 2019, Chase economists have not yet seen signs that the stimulus benefit expiration has caused any major economic disruption. However, this is likely to change as economists are warning of more severe impacts if Congress is not able to resolve the political impasse and reinstate some level of federal unemployment benefits.

Effect on Banks 

With profits and margins at all-time lows and deposits flooding in, the U.S. banking system faces an uncertain future with no clear consensus on what to do. The most recent quarterly report from the FDIC, released last week, offers a sobering perspective on the challenges faced by banks. 

  • System-wide profits were about $19 billion through the second quarter of 2020 – a huge decrease from the $55 billion generated in the second quarter of 2019 
  • Credit loss provisions have skyrocketed with upwards of $62 billion being set aside to protect against future loan deficiencies in the second quarter on top of nearly $53 billion in the first quarter – reflecting historical highs where past quarterly provisioning had not exceeded $20 billion
  • Average net interest margin for the industry declined to 2.81% in the second quarter; down 58 basis points from 3.39% compared to same period in 2019

Meanwhile customer deposits increased by more than $1 trillion in both the first and second quarters, totaling $2.4 trillion in growth in just six months. This is five times higher than any other six-month period and is a result of consumers being unable to travel and spend as they normally do and corporate customers retaining more cash to help protect their businesses. 

While the economy seems to be doing reasonably well now and the stock market is at or near historic highs, this may be a temporary and fragile position. With no political agreement relating to extending unemployment benefits seemingly in reach, infection outbreaks popping up as schools, colleges and universities reopen for the Fall, and a broadly available vaccine months away at best, the outlook for banks seems just as challenging and uncertain as it was back in the Spring.  

What More Can You Do? 

In our previous newsletters, we have discussed a number of actions banks and issuers can take to address performance challenges driven by the pandemic. We know many of our clients have invested heavily to support work-from-home environments, increase digital capabilities and drive customer engagement and transaction volume in the face of this unprecedented global maelstrom. We have also heard of those who may be considering layoffs and other top-end spending cuts – just to try to stay ahead of continuing economic dislocations.  

However, with revenue still challenged across multiple product categories, we have strongly recommended consumer banking and credit card executives take a deep dive into some untapped expense categories which could help support future profitability. Your team may be flat out trying to support the business and your customers so now is the time to leverage a partner like Profit Insight who can help dig into hard-to-analyze categories such as operations, loyalty and payment network expenses. 

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