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Editor’s blogJuly 21 2020

When does debt forbearance end?

Amid reports about huge Covid-19-related credit losses ahead, banks will have to take tough decisions on which borrowers to continue supporting.
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When does debt forbearance end?

Banks have so far played a positive role in backing businesses through their Covid-19-related problems. Given the banking industry’s need to recover its reputation following the bad headlines of the financial crisis this has been a welcome departure.

But payment holidays and related moves cannot last forever and the trickiest banking decisions on credit have yet to be taken. The basic calculation to be made is this: is a particular business temporarily in trouble because of the pandemic or has the economic reality so fundamentally changed that the business model in question is no longer viable?

The earnings outlook for banks over the next 18 months is extremely poor and some will take credit hits sufficiently large to take them into loss making territory. The differences in the fortunes of individual banks will depend very much on how they handle the Covid-19 credit issue.

The earnings outlook for banks over the next 18 months is extremely poor 

Banks which get this calculation right from a credit perspective will get their earnings to a better place than those which don’t. But in doing so they may receive criticism from an angry business community that feels they should be more supportive.  

Steering a course between doing what’s right for the balance sheet and what’s right for the bank’s reputation is the big test that CEOs face over the coming months. The more they can tailor decisions to the specific circumstances of a business and explain even a negative decision to the borrower, rather than adopting a mechanical by-the-numbers approach, the better will be the result on both fronts.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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