Garnet Capital Advisors Blog

EXCERPT: Banks are finding themselves with plenty of cash from boosted deposits, leaving them wondering what they are to do with all that money while trying to increase profits.

 The COVID-19 pandemic has presented banks with a unique dilemma. On the one hand, they're seeing a slew of deposits. But on the other, they're experiencing tight margins and reduced profits. And a string of bad loans in the near future is on the forecast.

According to a recent report from the Federal Deposit Insurance Corp., profits have tanked for banks of all sizes. At the same time, billions of dollars are being set aside for anticipated loan losses.

The report also showed that margins have sunk to an all-time low while income from fees has reached record highs. Out of fear of what the pandemic will do to the economy, consumers have been depositing funds in droves.

A recession was expected in the spring when the pandemic first hit, but financial institutions are anticipating a much more pronounced recession than initially thought. The economy has certainly taken a big hit, though it's been doing fairly well despite the crisis.

That said, any financial assistance offered by the government may only be postponing financial distress rather than curing it. As such, many banks are preparing for a number of loan defaults over the coming months and quarters.

Banks Concerned About Profit Margins Amid the Pandemic

Considering the current situation, there is great concern among banks regarding how they will see profits grow. Net income for the entire banking industry plummeted 70 percent from the same time last year down to $18.78 billion. While that was a slight uptick from Q1, it was the lowest quarterly income in a decade.

It should be noted, however, that the big four banks: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo - are skewing the numbers as they comprise approximately half the decline. Over 4,600 community banks in the FDIC's data actually reported a net income aggregate increase of $202.5 million.

Sunken profits were the result of an increase in credit loss provisions as banks set funds aside in case of loan defaults in the near future. About $115 billion has been stashed away by banks over the first two quarters.

Banks were hit with the lowest lending margin since 1984 when the FDIC began recording the data. The average net interest margin decreased to 2.81 percent from 3.39 percent last year.

Margins have already been tight thanks to interest rates hovering near zero, which are expected to remain there for the foreseeable future. And last-minute cuts have had a significant impact on income, which banks are struggling with as they scramble to find ways to replenish it.

Banks Encouraged to Revamp Their Loan Portfolios

While the FDIC expects deposits to normalize at some point, banks are still left dealing with being flush with cash and in need of good loans. Fortunately, Garnet Capital has plenty of good portfolios available to banks to bolster their balance sheets.

Banks are encouraged to revisit their loan portfolios and make some changes to hedge against risk and keep profit margins wide. And by selling off risky assets and acquiring stronger ones, banks can strengthen their books.

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