Since the start of 2020, financial services firms around the world have been responding to the COVID-19 pandemic. How they are dealing with the challenges thrown at the in this crisis has credit rating implications. In a new report, titled ‘Coronavirus Downside Scenario: Global Financial Institutions Risk Heat Map’, Fitch Ratings has assigned vulnerability scores to the major financial institution (FI) sub-sectors to show their potential sensitivity to a severe coronavirus downside scenario. The scenario is only used to test rating sensitivities that Fitch publishes in rating action commentaries, and is not a reflection of its current rating expectations. The downside scenario includes a prolonged health crisis resulting in depressed consumer demand and a prolonged period of below-trend economic activity that delays any meaningful recovery to beyond 2021.
The rating vulnerability scores under the downside scenario for each sub-sector are on a scale from ‘1’ (virtually no impact, no rating changes) to ‘5’ (high impact, most or all ratings negatively affected). The sub-sectors in different regions are based on the FI portfolio segmentation in the cross-sector heat map, which comprises banks of varying sizes and a variety of non-bank FIs, insurance and funds and asset management sub-sectors.
The report shows that the majority of FI sectors in North America, EMEA, APAC and LATAM are assigned a score of ‘3’ (medium impact) and ‘4’ (medium to high impact), due to the prolonged nature and severity of the downside scenario. Heavy Outlook and Rating Watch activity are probable for about 77% of FI issuers, as well as numerous ratings changes.
Rating downgrades are viewed as most likely under a score of ‘5’, which is assigned to larger LATAM banks, European Global Trading and Universal Banks, aircraft lessors globally and US- and APAC-based private-equity collateralised fund obligations. LATAM emerges as the most vulnerable region, due to the large number of LATAM sovereigns with negative outlooks, which are therefore exposed to further potential negative sovereign actions.
Responding to the pandemic
The Fitch report shows how widespread the impact of the COVID-19 pandemic has been on financial services. Elsewhere, the Deloitte Center for Financial Services has conducted a flash-fielded survey to learn how companies in the financial services industry are adapting to crisis management and business continuity planning, and how they can apply lessons learned to future crises.
While nearly three-quarters of the survey respondents felt that their firms were better than moderately prepared to handle the impacts of the crisis, only 16% felt their response plans worked well. The most common gaps were in the plans’ ability to anticipate responses specific to a global pandemic (59%) along with shelter-in-place orders (50%). Respondents also cited technology challenges (34%), particularly when it came to dealing with increased trading volumes and demand for loans as a result of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
As they plan for upcoming contingencies, most survey respondents (48%) expect a gradual and prolonged progression of the virus’s spread. But respondents also noted inverse time frames when planning for operational versus financial contingencies. While most are planning for operational contingencies over the next six months, almost 40% anticipate the need to extend financial contingency plans for longer than six months.
Deloitte says that its conversations with FSI executives mirror this finding: Forward-looking planning activities are just getting underway; time frames range from through the summer to over the next two years. Indeed, some banks are publicly adjusting their stress tests to consider more extreme scenarios.
Looking forward, the survey asked respondents about their firms’ main strategic priorities as the recovery continues. Overall, respondents indicated the following top three priorities:
Respondents cited increasing digital capabilities around client interactions (the top strategic imperative for 53% of respondents), and technology upgrades in general (top priority for 17%), as critical issues. Deloitte says it anticipates a doubling-down on the speed of digital transformation over the coming months and years. These efforts will include increased spending on cloud technology; data centre evolution; digitisation of client experience, from onboarding to servicing; smart use of tools to improve the agility of response, communication, and reporting during an event; and investments to support more updated business impact analysis data, which will help firms assess and respond to a range of potential future scenarios.
Future of work
Respondents mentioned the need to both reimagine the talent operating model - what work gets done, and by whom (in the top three priorities of 42% of respondents) - and their real estate and sourcing strategy - where work gets done (in the top three priorities for 36%). Across firms, various business units and functions will need to codify the practices that were invented during this crisis. These include contingency skills matrices, deeper succession plans beyond the executive suite, and just-in-time staff onboarding and training modules, to name a few.
Where does the know-how live inside many FSI firms? Many firms have learned that important knowledge is embedded in people’s institutional memories and 30-year old processes that lack playbooks, many of which are still done manually. Controls will need to be redefined to function with a remote workforce. The most critical controls - process, detective, and preventative controls that rely on improved workflow tools - will be digitised, along with machine learning and visual risk-sensing capabilities. One-third of respondents (33%) had controls redesign and digitisation as one of their top three priorities.
About the survey
The Deloitte Center for Financial Services fielded a flash survey of senior executives in the US financial services industry with responsibility for crisis management and business continuity planning at their firms. The survey was fielded from April 17 to 21. Of the 100 responses we received, a quarter were from C-suite executives and the remainder from other senior executives, ranging from director to executive vice president.
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