How banks should prepare for first- quarter earnings in light of Covid-19

by Matthew Keating and Tony Rossi

Earnings season presents historic challenge for financial institutions

Given the rapid acceleration of the Covid-19 pandemic, the first-quarter 2020 reporting season will be the most challenging period for banks since the Great Recession.

Management teams will likely face many questions they have never been asked before as the investment community attempts to assess the current and future impact of the Covid-19 crisis on their companies.
Based on our discussions with analysts and investors, we have outlined information we think banks need to be prepared to provide in their first-quarter earnings reports, either in their prepared materials (earnings releases, slide presentations, conference calls scripts, and so on) or in response to questions.

Asset Quality/Loan Monitoring

  • Amount of exposure to stressed industries (for example, hotels, restaurants, travel, oil & gas, and so on) including non-cancelable unused commitments
  • Average debt service coverage ratios and loan to value in stressed portfolios
  • Dollar amount of loan payment deferral requests received to date
  • Status of construction loans and impact of delays, material shortages, and so on
  • Percentage of borrowers that have provided current financial data (including March 2020)

Balance Sheet Trends

  • Credit line use trends by month
  • Deposit flows by month
  • Impact of Covid-19 crisis on new loan production and the loan pipeline
  • Trends in residential mortgage originations and expectation for how purchase loans will be impacted in traditionally strong quarters for housing
  • Changes to underwriting criteria/loan pricing in response to Covid-19 and drop in interest rates

Net Interest Margin

  • Changes in deposit rates during March and April
  • Ability to pass through additional rate cuts to depositors
  • Percentage of variable rate loans that have hit floors
  • Opportunities/capacity to use wholesale funding to manage interest expense

Fee Income and Expenses

  • Impact of fee waivers on non-interest income
  • Trends in credit and debit card transaction volumes
  • Expense management initiatives implemented to offset revenue declines
  • Additional expense resulting from the impact of Covid-19 on operations

IR professionals should closely monitor the latest trends in bank communications practices to find the best ways to keep their investors and analysts informed in this challenging time.

Matthew Keating and Tony Rossi are senior vice presidents of Financial Profiles, a strategic communications firm