First Quarter 2020: COVID-19: From Headwind to Hurricane

July 2, 2020

First Glance 12L provides a quarterly look at banking and economic conditions within the Federal Reserve System’s Twelfth District. Through 1Q20, District banks’ earnings sank as net interest margins narrowed and provision expenses surged. Earnings impacts were greatest among larger publicly-traded banks, which adopted new loan loss allowance accounting during the quarter. Problem loan levels were affected only mildly, in part because the severe phase of the COVID-19 pandemic did not begin until late in 1Q20. Subsequent borrower accommodations and federal stimulus will likely moderate near-term impacts on delinquency and loss rates. On-balance sheet liquidity improved as cash from jittery investors and proceeds from pre-emptive draws on credit lines were deposited into banks. The resulting asset growth, combined with dividend payouts amid weakening earnings, pressured banks’ capital ratios. The District’s annual job growth rate, which decelerated in March and plummeted in April, recovered only slightly in May. Home prices held steady or increased amid much lower sales volumes in April, but lender optimism about future home price growth fell sharply. Likewise, third-party forecasts suggested that demand for, and pricing of, commercial real estate will come under pressure. Notwithstanding significant federal stimulus, the future path of the recovery remains uncertain.