COVID-19 has taken the world by storm, and for the first time since the Great Depression, both advanced and emerging economies are plunging into recession simultaneously. The CEE countries are now bracing for their sharpest recession on record, facing heat from lockdown measures that are taking a toll on domestic demand and the external shock of depressed business activity, causing liquidity stress, the increased probability of default, shrinking asset values, canceled orders, and delayed payments. These are all bound to have a major impact on the banking sector in general and in CEE in particular. Even though governments in the region have swiftly implemented action plans and central banks have stepped in with unprecedented relief measures, will it be enough to keep the banks afloat?
Banking sectors in the region are set to face major challenges, with Fitch revising the outlook for the CEE banking sector to negative and several banks already slashing their budgets for 2020. While compressed net interest margins, a decline in fee income and possibly in the trading income, credit losses across a vast array of businesses and sectors, and potential operational losses due to increased fraud and cyber‑attacks will undoubtedly erase a large part of CEE banks’ profits for the year, the increased COVID-19-related lending as well as the capital and liquidity buffers built after the global financial crisis in 2018 could be the silver lining to lessen the swells of the recession. However, the robustness of the system will be extensively tested in the coming months and it will depend on how soon the lockdowns are lifted, business activity is resumed, and consumer demand shows recovery.
Tough times lie ahead for banks, but as of now, they are expected to play a crucial role in this crisis. Do these banks have what it takes to weather the storm, and can they use this turmoil to create opportunities for growth and change for the better?
For our detailed analysis of how banks in the CEE region are being affected by the pandemic, including pointers and reflections on the banking sector now and in the post-COVID-19 world, read our report: COVID-19: Assessing the impact on CEE banks.