WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEM - Oliver Wyman
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WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEM Reports from Brazil and Australia August 12th, 2020 Please note that this session was held at a particular point in time (Wednesday, August 12th, 2020, 4pm-5pm EDT), and in light of the rapidly evolving COVID-19 situation, it is possible these discussions are no longer accurate after that date.
CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information. Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies, and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman. © Oliver Wyman
WEBINAR AGENDA 1 Epidemiological update 2 Macroeconomic outlook 3 Perspectives from Brazil 4 Perspectives from Australia 5 Q&A © Oliver Wyman 3
OUR PANELISTS
Til Schuermann Nuno Monteiro
Partner & Co-Head, Risk Partner, Financial
& Public Policy Services
Helen Leis
Partner, Health & Life Nicholas Tonkes
Sciences Partner, CFA & CIS
© Oliver Wyman 4
01
EPIDEMIOLOGICAL
UPDATE
Helen Leis
Partner, Health & Life
Sciences
RECENT HOTSPOTS IN THE SOUTH AND WEST ARE BEGINNING TO SHOW SIGNS OF
SLOWING CASE GROWTH WHILE PARTS OF THE MIDWEST HEAT UP
Active cases per million by state
As of August 9th, 2020 Example states
8,000 Forecast launch
7,000
6,000
5,000
4,000
Missouri
3,000 Texas
Illinois
Florida
2,000 California
Indiana
1,000
New York
0
3/1 3/8 3/15 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 5/31 6/7 6/14 6/21 6/28 7/5 7/12 7/19 7/26 8/2 8/9 8/16 8/23
© Oliver Wyman 6
DUE TO HIGH ACTIVE CASE COUNTS AND LIMITED TESTING, RISK IS STILL HIGH IN THE
SOUTH AND WEST, WHILE NEAR TERM RISK HAS INCREASED IN THE MIDWEST
Data as of: Legend:
8/4 % Change in new
daily cases (2 weeks)
Circle size: # of active cases
Testing rates 0% or less 1–25%
>10% indicate 26–50% 51–100%
capacity issue,
101+%
suggesting
confirmed case Testing capacity insufficient
growth is to capture true case growth
limited by
tests, not true Fully reopened1
FL2 caseload in Partially reopened
region
Partially reclosed (after
reopening)
South/West Rural States Midwest Northeast/Mid-Atlantic
High Risk Moderate-High Risk Moderate–High Risk Moderate Risk
• 9 of 10 states with highest active cases are in • All fully reopened and fared well for • Cases continue to rise across most of • Generally hit hard by initial outbreak
South (CA is 3rd) multiple weeks the region • Cautiously reopening after case decline,
• Case growth appears to be slowing, but may • Though some case counts are still low, • IL, MO, OH, WI are all in the top 20 though many (NY, NJ, DE) have paused
be a result of limited testing - Several states hotspots like Idaho now in top 10 active states by active cases, signaling reopening plans
(MS, AL, FL, NV, AZ, SC, TX, GA, and AR) have cases/capita potential shifting of epicenter • Pockets of Northeast (NJ, CT, MA, RI) are
positive test rates of >10% • Despite low active case counts, - AK, NE, • Many states (MO, KS, IA, IN, KY, WI, showing signs of outbreak, with 2 week case
• Alternative explanations for slowing growth in SD, MT, WY, and ND have all been MN, OH) have concerning rise in growth >50%
following slides growing for over a month with little signs positive test rates >5%
of slowing down
1. “Fully reopened” defined as when a majority of high risk businesses, including bars, movie theaters, or gyms, have been reopened with indoor service. This chart does not account for regulatory restrictions that may or may not be in place
© Oliver Wyman in those businesses, including mask wearing or capacity constraints. 2: Florida has considered reclosure of a number of risky venues, including bars, gyms, & restaurants, but ultimately decided to only reclose bars; thus, Florida is still 7
considered “fully reopened”
HOWEVER, WHILE THE MIDWEST HAS SHOWN SIGNS OF RISING CASES, THE NEAR TERM
OUTLOOK IS NOT AS SEVERE AS IT WAS IN THE SOUTH IN JULY
Key COVID metrics in Midwest (currently) vs. South (1 month ago)
Midwest (as of 8/9) South (as of 7/9)
States included in set IL, IN, IA, KS, KY, MI, MN, MO, AL, AR, FL, GA, LA, MS, OK, SC,
OH, WI TN, TX
Median mobility 86% of baseline 90% of baseline
Median 2 week case growth 11% 100%
Median active cases per 1M 1810 2400
Median tests per 1M 1940 1920
Median % positive tests 7.5% 11.8%
% of states with mask mandates 80% 10%
• Case growth is much less severe, allowing Midwestern states more time to respond to renewed outbreaks
• Testing is stronger in the Midwest, with similar capacity but lower active cases and % positive rates, though some states (MO, KS, IA) are currently at
high risk from testing capacity strain
• Mask mandates and social mobility are also stronger in the Midwest, hopefully dampening severity of the outbreak
© Oliver Wyman 8EVEN IF HOTSPOT CASES ARE TRULY DECLINING, STATES WILL STILL HAVE TO DEAL WITH
RISING DEATHS FOR THE FORESEEABLE FUTURE There is a ~3-4 week lag between new cases and
associated deaths; deaths in hotspots spiked ~1 month
after cases started rising. Lag is longer now than in early
pandemic due to increased testing catching cases earlier
The effects of the sharply rising case rates throughout the summer are New cases per 1m
still being felt in plateauing/declining hotspots 600
400
Spike begins
• Though new daily hospitalization growth has appeared to slow
down in recent days, the lengthy lag between diagnosis and 200
outcome ensures that hospitalizations are on the rise even in 0
states with clear new case declines May Jun Jul Aug
• This trend is mirrored in deaths (with a longer time lag), as new New hospitalizations per 1m1
25
daily death rate tended to increase throughout July in hotspot 20 Spike begins
states, even as case rates stabilized 15
• Health systems will be dealing with capacity strain for a month or 10
longer after cases peak – this strain will be exacerbated in regions 5
with plateauing (not declining) new daily case rates 0
May Jun Jul Aug
– Plateauing case rates may lead to even higher death rates as a New deaths per 1m
result of sustained demand for beds, ventilators, PPE, or 6
healthcare labor reducing quality of care for the population as a Spike begins
whole; states should strive for clear declines in case rates before 4
relaxing restrictions 2
0
1. New hospitalization data not available in Texas May Jun Jul Aug
© Oliver Wyman Florida Texas 9WE DO NOT YET KNOW IF CASE GROWTH HAS TRULY STABILIZED; POSITIVE TEST RATES
>10% INDICATE A TESTING CAPACITY ISSUE AND LIMIT ABILITY TO ASSESS GROWTH
7-day % positive testing rate
28%
Inadequate % positive rates • Though some states appear to be
26%
improving (AZ, TX), their positive
24%
MS rate is still high enough to limit true
22%
understanding of outbreak scope
20% AL
18%
FL
AZ
• There are currently 14 states with a
16%
ID
KS
>10% positive rate, including 7
14%
SC
TX hotspots that appear to have
12%
MO
AR
declining case rates:
10% % positive rate risk threshold – AL, AZ, FL, ID, KS, SC, TX
8% • While declining case rates and %
6% positives are encouraging, those case
4% rates should be taken with a grain of
2% salt until positive rates are well
05/31 06/07 06/14 06/21 06/28 07/05 07/12 07/19 07/26 08/02 08/09
below 10% in current hotspots
Alabama Florida Kansas Texas Missouri
Arizona Idaho South Carolina Arkansas Mississippi
© Oliver Wyman 10THE MAJORITY OF STATES CURRENTLY DO NOT HAVE ADEQUATE TESTING CAPACITY TO
ADDRESS EXISTING CASE GROWTH
New cases per thousand (including undetected cases) by tests per thousand for each state
As of August 9th, 20201
0.45
Inadequate capacity Handling the surge
Below average testing, above average cases Above average testing, above average cases
0.40 Louisiana
New cases per thousand (7-day rolling average)
0.35 Mississippi
0.30 Idaho Texas
Florida Georgia
Nevada Alabama Tennessee
0.25 Arkansas
South Carolina
Missouri Oklahoma
0.20 Arizona
California
North Dakota
Rhode Island Iowa Nebraska
0.15 North Carolina
Kansas Wisconsin Illinois
Utah Maryland
Montana
0.10 Managing with less Indiana New Mexico Alaska
Delaware
infrastructure Colorado Ohio Michigan District of Columbia
Below average testing, below Massachusetts
0.05 Pennsylvania West Virginia Connecticut
average cases
New Jersey New York Strongest capacity
New Hampshire Maine
Vermont Above average testing, below average cases
0.00
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 7.2
New tests per thousand (7-day rolling average)
Successful responses to COVID rely on quick and accurate testing; Until this issue is resolved, regional and federal responses will necessarily be less
effective
© Oliver Wyman 1. Quadrants determined using the average of state-level new tests per thousand (7-day rolling average) and average of state-level new cases per thousand (7-day rolling average) 11ALTERNATIVES TO COVID-19 CLINICAL PCR TESTING ARE EMERGING THAT HAVE THE
POTENTIAL TO ALLEVIATE CAPACITY CONCERNS (ONCE SCALED)
Type of test Description Potential future benefit Firms with FDA Emergency Use Authorization (EUA)
Quickly detects protein fragments on or Produce results more rapidly and cheaply • Becton Dickinson (BD) • Quidel
Antigen Testing within the virus; Rapid diagnosis and than PCR tests; are more amenable to POC
relatively cheap use
• Assurance Scientific • Kroger Health
Laboratories • LabCorp
Cheap collection at scale to reduce
• Color Genomics • P23 Labs
Allows for tissue sampling at-home or in a bottleneck at testing sites; if combined
• Compass • Phosphorous
At-Home Collection non-supervised/clinical setting; analysis with high throughput processing, possible
• Everlywell • Quest Diagnostics
still happens in laboratories to rapidly turnaround results for large
• Fulgent Therapeutics • RUCDR Infinite Biologics
swaths of populations
• Kaiser Permanente Mid-Atlantic
States
• Sherlock Bioscience • UCSF Health Clinical
Fast, precise diagnostic capabilities; if
Utilizes CRISPR machinery to detect COVID Laboratories
CRISPR developed for POC use, highly increase
genetic material from tissue sampling
scale and speed of testing
High Throughput Processes large amounts of samples with Sample processing at larger scale than • Color Genomics • Quest Diagnostics
Processing relatively short turnaround other diagnostics • Illumina
Allows for diagnostic testing at or near the • Abbott • Mesa Biotech
POC Molecular Substantially decrease turnaround time for • Atila Biosystems • Privapath Diagnostics
point of care, without delay from sending
Testing results • Cepheid
samples to a laboratory
Experimental technology is also being developed that may increase the scope and timeliness of testing – these new technologies include rapid detection from saliva,
breathalyzers, soundwave detection, or gold nanoparticles. These technologies should not be considered as anything more than experimental without further study.
© Oliver Wyman 12REOPENING SCHOOLS IS A CRITICAL AND HOTLY DEBATED ISSUE – IT LIKELY CAN BE
DONE SAFELY ONLY WHEN COMMUNITY SPREAD IS LOW
• America’s economic system can not function fully without schools, placing economic pressure on reopening
• Pediatric welfare also depends on in-person learning
Reopening schools should be a top priority, but must be done safely – reopening only when community spread is low is the best
way to limit further disruption
• Low community spread mitigates risk from reopening schools
– The U.S. CDC’s official stance is that COVID-19 transmission in schools is not a significant risk when overall
community spread is low2, and independent experts agree7
• However, reopening schools without low community spread or adequate precautions can be significantly disruptive:
– The United States has started to reopen schools in the midst of still rising cases, leading to almost immediate
disruption, including quarantine of hundreds of students and staff in newly reopened districts
– Some districts have been forced to reclose temporarily after only days of in-person operations
Despite previously reported lower severity of illness in children, recent studies suggest that kids can become infected and transmit
the virus at rates similar to adults, especially in children >10
© Oliver Wyman 1. U Chicago, 2. CDC, 3. NYT, 4. NYT, 5. ABC News, 6. IPS News, 7. NPR 13SCHOOLS NEED TO LIMIT THE RISK OF TRANSMISSION ACROSS ALL PHASES OF
REOPENING
Planning for reopening Executing reopening Continuing operations
• When to reopen • Limit importation: The first priority should be to • When to reclose: Schools and the relevant
– Community spread should be low stop cases from entering the school authorities should have a clearly defined response
– Thresholds should be clearly defined and – Health screening paired with testing (health to any positive cases within the student body or
communicated to enable effective planning screening alone unlikely to effectively diagnose staff that includes:
– Generally, epidemiologists agree upon a 5% infection) – Defined threshold of positive cases at which the
positive rate as an adequate threshold for – Strict policies on symptomatic individuals or school recloses
reopening8 close contacts staying home – Clearly defined plan or policy for when to reopen
• For whom to reopen If the virus makes it into a school… – Testing policies allowing for rapid diagnosis
– Several studies suggest transmission is less • Limit transmission: The school environment should • How much to reclose: Plans should consider extent
common among children02
MACROECONOMIC
OUTLOOK
Til Schuermann
Partner, Risk & Public
PolicyLast updated: 8/10/2020
THE US ECONOMY IS EXPERIENCING A SEVERE SHOCK: GDP
The escalation of the COVID-19 crisis has resulted in unprecedented volatility in forecasts
U.S. Real GDP Growth Forecasts – Q3 2020 to Q4 2021 Key observations from estimates
QoQ annualized growth rate, by select economic analysts1
3Q20 4Q20 1Q21 2Q21 3Q21 4Q21
• Q2 2020 was the worst quarter
30
TD on record
Annualized growth rate (%)
25
• Forecast updates for Q3 2020
GS
20 FRBATL (Aug 7)
JPM
have been moving lower (or flat)
15
CBO
BAC FRBNY (Aug 7) over the last month, but still with
DB UBS
MS CBO MS
MS significant uncertainty in
10 GS
MS DB GS DB UBS
UBS GS
CBO UBS GS forecasts
UBS TD TD
CBO TD GS UBS DB
5
MS CBO DB • Key indicators to track include:
BAC JPM JPM MS TD CBO
JPM DB JPM TD
0
– Cycle of opening and closing in
1Q202 2Q203 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21
regional economies
Avg -4.8% -33.1% 17.2% 6.5% 5.5% 4.7% 5.3% 4.4%
Max -2.3% -29.0% 28.0% 9.2% 8.0% 6.5% 10.7% 10.4% – Reliance on “smart” mitigation
Min -9.9% -35.0% 10.6% 4.5% 3.9% 3.1% 3.0% 2.7% strategies (e.g., mass testing,
Act. -5.0% -32.9% analytics)
1. JP Morgan (July 31), Goldman Sachs (July 12), Morgan Stanley (July 17), Toronto Dominion (June 17), UBS (July 29), Bank of America (July 31), Deutsche Bank (July 28), CBO (July 2)
2. JP Morgan (April 24), Goldman Sachs (April 29), Morgan Stanley (April 27), Toronto Dominion (April 20), UBS (April 29), Bank of America (April 17), Deutsche Bank (April 28), CBO (April 24)
3. JP Morgan (July 17), Goldman Sachs (July 12), Morgan Stanley (July 17), Toronto Dominion (June 17), UBS (July 29), Bank of America (July 24), Deutsche Bank (July 28), CBO (July 2)
© Oliver Wyman 16Last updated: 8/10/2020
THE US ECONOMY IS EXPERIENCING A SEVERE SHOCK: UNEMPLOYMENT
The escalation of the COVID-19 crisis has resulted in unprecedented volatility in forecasts
U.S. Unemployment Forecasts – Q1, Q2, Q3, and Q4 Key insights
Quarterly unemployment rate, by select economic analysts1
2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 2020 2021 • Unemployment claims filed since
15
April
start of the COVID-19 lockdown have
CBO
May wiped out the last eleven years of job
Unemployment rate (%)
June DB UBS CBO gains2, 3
JPM CBO DB
10 GS Moody’s
July JPM DB JPM CBO
JPM CBO CBO JPM GS JPM
UBS • Most unemployment forecasts
TD GS DB GS Moody’s
TD TD
DB
GS JPM GS
GS
TD
CBO TD DB CBO assume a steady recovery for 2H20
TD DB TD GS
TD DB and 2021 and appear not (yet) to
5
account for the possibility of
subsequent waves of lockdown
0
Institutional forecast CBO forecast Actual
• Unemployment estimates will likely
3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 2020 2021 be quite volatile for a while
Avg 10.9% 9.3% 8.5% 7.9% 7.3% 6.8% 9.6% 7.8% • Congressional Budget Office
Max 14.1% 10.5% 9.4% 8.6% 8.0% 7.6% 10.8% 8.9% forecasts a slower employment
Min 9.2% 7.9% 7.5% 7.3% 6.8% 6.3% 8.5% 7.0%
recovery than most major banks
Act. 10.2% (Jul)
1. Goldman Sachs (July 12), JP Morgan (July 31), UBS (July 29), Deutsche Bank (July 28), Toronto Dominion (June 17), CBO (July 2), Moody’s (June 22); U.S. Bureau of Labor Statistics. 2. U.S. Bureau of Labor Statistics. 3. Tracking
unemployment forecasts against unemployment reports may be misleading – unemployment reports only record jobless workers actively searching for employment
© Oliver Wyman 17THE ECONOMIC IMPACTS APPEAR TO BE CORRELATED WITH THE STRINGENCY OF
GOVERNMENT RESPONSE
Real GDP Growth vs. Oxford Stringency Index Key observations
All figures Q2 2020 except as noted below
90 • In general, greater government
More Portugal
France Belgium response in the form of behavior
Oxford Stringency Index, Quarterly Average
stringent 80
Mexico Singapore restrictions (“stringency”)
Italy
Spain Canada United StatesIndonesia
United Kingdom 70 corresponded to more adverse
Germany
Austria 60 immediate economic impact
China, Q1 South Korea
50
• However, economic impacts on a
Czech Republic
Sweden specific country likely a
Hong Kong, Q1
40 combination of other factors
30 beyond government response
Taiwan • Improved adherence to public
20
health guidance now could allow
10
for more robust recovery later….
-
-70 -60 -50 -40 -30 -20 -10 0
GDP Growth, QoQ% annualized
Sources: Oxford University, Oxford Economics/Haver Analytics
© Oliver Wyman 1803
REPORT FROM
BRAZIL
Nuno Monteiro
Partner, Risk & Public
PolicyIN BRAZIL, COVID-19 CASES ARE STILL GROWING CONSIDERABLY, WITH ESTIMATED PEAK
OF ACTIVE CASES EXPECTED TO BE REACHED IN AUGUST
COVID-19 in Brazil: Confirmed, Estimated Active, and New Credit market growth and GDP are strongly correlated
August 11th
Credit balance - real YoY growth Market consensus expects GDP
for 2020 to contract at least
GDP - real YoY growth
-5.0% vs. the +2–3% at the
30% beginning of the year
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Government quickly anticipated year-end target risk
free rate (SELIC) decrease, and went below historical
lows to stimulate credit availability by lenders
As the crisis spreads through the real economy, credit will be a central piece to amplify or smooth the recession
Source: Oliver Wyman Pandemic Navigator (https://pandemicnavigator.oliverwyman.com), World Bank data; BCB Séries temporais;
© Oliver Wyman 20COVID-19 CRISIS ARRIVES DURING THE SLOW AND LONG-WAITED RECOVERY AND WILL
IMPACT CREDIT AND NPL VOLUMES
Non-Performing Loans Credit volume outstanding
% of total loans in BRL BN
Early signs of increase in unemployment and Credit was recovering from 2015’s slowdown,
business bankruptcies, as suppressive measures but despite an increased demand from SMEs and
take place, indicate NPLs likely to grow in response individuals it is likely that credit supply will reduce
8 2,000
6 1,500
4 1,000
2 500
0 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
SME Corporate1 Consumer2 Trend Corporate Consumer Trend
Interest rates • COVID-19 crisis arrives in the arrives during a slow and long-awaited recovery, which is
Interest rates expected to increase as particularly concerning for Retail lenders
% a.a.
investor confidence falls and NPLs grow
50 – Likely NPL increase in vintages that were already originated in growth mode
– Little room to maneuver and avoid/ mitigate credit losses
40
30 • Despite surging demand for cash from Retail clients, we expect (and start to observe) little
20 appetite from lenders in supplying the much needed credit
10
• Individual lenders and the government will have to work together to provide aid and fuel the
0 economy – with the required guard-rails to maintain the stability of the system
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Corporate Consumer Base rate Trend
1. Pessoas Jurídicas, Brazilian term for “legal entities”, includes Corporates, SMEs and individual micro-entrepreneurs (MEI); 2. Pessoas Físicas, Brazilian term for natural person or individual
© Oliver Wyman
Source: Series temporais (Central Bank of Brazil) for total credit (incl. earmarked); Relatório de economia bancária, 2018 (Central Bank of Brazil); Oliver Wyman analysis on illustrative trends
21HOW THE DYNAMICS OF RETAIL CREDIT WILL CHANGE IN BRAZIL?
Understanding how the COVID-19 crisis will change Retail credit is critical for lenders to address the upcoming challenges, calibrating the credit supply
with a changing demand and adequately responding to government stimulus
COVID-19 crisis has been severing the Credit supply shock
flow of goods and people, hindering With higher uncertainty and complexity in the macro
economies and is in the process of scenario and the emerging real economy crisis,
investor confidence goes down and shift capital to safe
delivering a global recession havens, reducing appetite to lend
Credit demand surge Government stimulus
To provide a safety net to the
Individuals and firms face a economy, Government launches
cash crunch as a result of the stimulus packages that aim to
efforts to limit the spread of mitigate effects of the crisis and
the virus, leading to a strong bridge the mismatch of credit
increase in the need for credit Crisis in the real economy demand and supply
© Oliver Wyman 22CREDIT DEMAND SURGE
Individuals and SMEs will be strongly impacted by this crisis, and will need credit to fulfill their short-term cash flow imbalance during the crisis
# of companies in MM1 # of individuals in MM2
19.2 93.5
- 1.9 Medium and large
0.9
Small
55.1 Formal employee
6.6 Micro
Small business
Level of impact
and entrepreneurs
represent 90% of
total CNPJs, 27% of
GDP and 44%
of total payroll 18.2
Informal employee from
private sector/family biz Informal sector
9.8
represents 41%
Individual
of employed
(MEI) Informal employer/
20.2 population
self-employer
+
Feedback loop between cash crunch on SMEs and individuals – one reinforces the other
1. Data Sebrae as Mar 2020; 2. IBGE as Dec 2019
© Oliver Wyman 23CREDIT SUPPLY SHOCK
Increased credit risk during the crisis is the aggregate factor that strongly contributes to the credit supply shock, but challenges and complexity emerge
for all links in the credit value chain
Credit value chain Key challenges emerging from the crisis
Client acquisition Surge in number of clients seeking credit, favoring large banks that serve as a “first stop shop”, which results in
= Favors the large adverse selection for other players
Change in customer profile, mix, and the new macroeconomic scenario mean that credit models and policies used
Credit decision
during “business as usual” are much less accurate in predicting credit performance – lenders needs a COVID-19
= Less accurate
playbook
Funding Higher uncertainty and complexity causes investor confidence to go down and shifts capital to safer assets,
= More expensive increasing funding costs, with strong impact for fintechs and smaller lenders who are Balance Sheet-constrained
Increase in delinquent volume is driven by constraints in the capacity to repay (rather than unwillingness to pay
Collections
from borrowers), which makes debt collection efforts ineffective – particularly in a moment where “hard”
= Less effective
collection is not advised
Customer service Strong, broad-service digital channels are even more necessary now, given unavailability/sanitary risks of brick-
= More digital and-mortar channels, associated with potential operational challenges to call centers
© Oliver Wyman 24FIRST SIGNS OF COVID-19 IMPACT IN THE CORPORATE CREDIT PORTFOLIO
June 2020 data already showed a considerable impact on the corporate portfolio, with a peak due to FX in March, followed by a relevant decrease in all
lines except working capital
Covid-19 impact on Corporate credit portfolio
Originations: Dec/19 to Jun/20 Balance: Dec/19 to Jun/20 Arrears and defaults: Dec/19 to Jun/20
Indexed Dec/19=100 Indexed Dec/19=100 % of balance
Peak in May
220% driven by FX 40% 2,7% 2,6%
(ACC1 and
200% 35% 2,6%
Export
Financing) 30% 2,5%
100% 2,4% 2,4%
2,3% 2,3% 2,3%
25% 2,4%
80%
20% 2,3%
60% 2,2%
15% 12% 2,2% 2,1% 2,1%
40% 9% 2,1%
10% 2,1%
15%
20%
5% 2,0% 2,0%
0% 1,9%
0% 1,9%
-20%
-25% 1,8%
-5% 1,8% Covid-19 effects on
-40% -10% 1,7% credit quality still not
-60% realized – decrease due
-15% 1,6%
to government stimuli
-80% -20% 1,5% and lower origination 1,4%
-100% -25% 1,4%
Total CC factoring Overdrafts Export financing Arrears 15-90 days
Factoring Working capital ACC1 Other Defaults
1. “Adiantamento de contrato de câmbio” – FX contract anticipation. Source: Banco Central do Brasil; Bank earnings releases
© Oliver Wyman 25FIRST SIGNS OF COVID-19 IMPACT IN THE CONSUMER CREDIT PORTFOLIO
For consumers, there was a fall on credit volumes driven mostly by credit cards, due to lower transaction levels; effects in credit quality still not realized
Covid-19 impact on Consumer credit portfolio
Originations: Dec/19 to Jun/20 Balance: Dec/19 to Jun/20 Arrears and defaults: Dec/19 to Jun/20
Indexed Dec/19=100 Indexed Dec/19=100 % of balance
5,6%
5% 12% 5,6% 5,5%
10% 5,4% 5,3%
0% 8% 5,2%
5,2% 5,1%
6% 5,0%
4,9%
5,0% 4,9%
-5% 4% 4,8%
2% 4,8%
2%
4,6% 4,6%
-10% 4,6%
0% 4,4%
4,4% 4,3%
-15% -17% -2% -1%
-4% 4,2%
4,0%
-6% 4,0%
-20% -22%
-8%
3,8% Covid-19 effects on
-25% -10%
3,6% credit quality still not
-12% realized – decrease due
-14% 3,4%
-30% to government stimuli
-16% 3,2% and lower origination
-35% -18% 3,0%
Total Personal loans Others Arrears 15-90 days
Overdrafts Credit cards Defaults
Source: Banco Central do Brasil; Bank earnings releases
© Oliver Wyman 26FIRST SIGNS OF COVID-19 IMPACT ON BANK PROVISIONS AND MARGINS
Large financial institutions have already anticipated some of the expected increase in losses in their provisions
Provisions Financial margin with clients
R$ BN R$ BN
% change % change
Q1’20 / Q4’19 Q1’20 / Q4’19
12 19
11 18
10,4 69% 17,0
17 -6%
10
16 15,3
9
15
8 14
13,0 0%
7 6,7 69% 13
6 6,5 34% 12
5,4
11 11,3
5
4,1 10 9,2 -4%
4 3,9 3,4 15% 9
3 2,7 7,5 -21%
8 8,5
2 7
1T18 3T18 1T19 3T19 1T20 1T18 3T18 1T19 3T19 1T20
Bradesco Santander Itaú BB
Source: Banco Central do Brasil; Bank earnings releases
© Oliver Wyman 27BRAZILIAN BANKS LIKELY TO WITHSTAND SHOCK, WITH HIGH SPREADS SUFFICIENT TO
SUSTAIN CAPITAL RATIOS DESPITE SHARP REDUCTION IN ROE
Starting point Projected impact of pandemic scenarios for major banks
~23% "Smart & Lucky“ scenario "Winter Return“ scenario
Sustainable ROE reduction (%) Sustainable ROE reduction (%)
~18%
0% 5% 10% 15% 20% 5% 10% 15% 20%
0% E2 0%
1% E5 1%
CET 1 Depletion (%)
CET 1 Depletion (%)
E3 E4
2% 2% E5
~6% E1 E2 E3
3% 3%
4% 4% E1 E4
5% 5%
6% 6%
Net interest income
Return on equity
Regulatory capital
(%)
(%)
(%, before tax)
7% 7%
Above Threshold Below Capital Conservation Buffer
Source: Worldbank, Banks’ public fillings, Oliver Wyman analysis
© Oliver Wyman 2804
REPORT FROM
AUSTRALIA
Nicholas Tonkes
Partner, Risk & Public
PolicyMACRO IMPACT: OLIVER WYMAN DEVELOPED 5 POTENTIAL SCENARIOS – OUTCOME
LIKELIHOODS HAVE EVOLVED OVER RECENT MONTHS
Scenarios and likelihoods Observations
March April May June
• Continued downgraded of macro forecasts from March
V shape recovery and April as the pandemic spread and lockdown measures
0 70% 0% 0% 0% intensified
U shape recovery • Economist initially anticipated a V-shape recovery (quick
1 30% 20% ~0% ~0% elimination of the virus) as baseline and U-shape (longer
elimination) as the downside scenario
Vw shape recovery
• Following considerations of potential further outbreaks,
2 0% 35% 60% 70%
seasonality effect and gap from herd immunity, Vw & VW-
shape recoveries emerged as likely options replacing the
VW shape recovery V-shape
3 0% 45% 40% 30%
• The recent flattening of the curve, increase in testing &
L shape recovery tracing capacity, and rapid economic reopening have
4 0% 0% 0% 0% increased the likelihood of a Vw shape recovery
• This in turn, is also reflected in the slight improvements in
Average forecasts (fortnightly)1 09/03 23/03 06/04 20/04 04/05 18/05 01/06 macroeconomic forecasts
GDP growth YoY % 0.1 -1.2 -4.1 -5.0 -5.0 -5.1 -4.2
Unemployment rate % 5.8 6.3 8.3 8.4 8.5 8.2 8.0
Source: AMP, ANZ, CBA, Fitch, JP Morgan, Morgan Stanley, NAB, Oxford Economics, UBS, Westpac
© Oliver Wyman 30MACRO IMPACT: DIFFERENCE BETWEEN SCENARIO 2 AND 3 IS DRIVEN BY THE
EFFECTIVENESS OF CONTAINMENT MEASURES IN SUPRESSING FURTHER OUTBREAKS
Scenario 1 Scenario 2 Scenario 3
Elimination over longer period 2020–21 Additional outbreaks contained in 2020 Additional outbreaks over 2020–21
(U shape) (Vw shape) (VW shape)
Economic impact
Likelihood: ~0% Likelihood: ~70% Likelihood: ~30%
Recovery shape
• 6–12 months: Phased reopening of the economy by • 3–4 months: Rapid reopening of the economy • 3–4 months: Rapid reopening of the economy
sector/region • 4–18 months: Additional wave(s) of virus addressed by • 4–18 months: Additional wave(s) of virus beyond health
• 12–18 months: International arrivals/immigration smart containments system capacity, requiring additional lockdowns
resumes • 12–18 months: International arrivals/immigration • 12–24 months: International arrivals/immigration
• GDP YoY drops 10% and unemployment peaks at 12% in resumes resumes
2020 driven by prolonged restrictions, with rapid • GDP YoY drops 7% and unemployment peaks at 10% in • GDP YoY drops 10% and unemployment peaks at 12% in
recovery in 2021 2020, with slower recovery in 2021 due to outbreaks 2020, with slow recovery in 2021–22 due to further
• HPI drops 20% in 2020 as unemployment peaks and • HPI drops 10% in 2020 as consumer uncertainty is offset outbreaks
foreign demand reduces, followed by gradual recovery in by return to employment, recovery in 2021–22 • HPI drop of 25% in 2020 due to high unemployment peak
2021–22 and consumer uncertainty, slow recovery in 2021–22
© Oliver Wyman 31MACRO IMPACT: IMPACTS ARE HEAVILY INFLUENCED BY THE COVID-19 R0, DRIVEN BY
PATHOLOGICAL & PUBLIC HEALTH CHARACTERISTICS
Vw-shape baseline and VW-shape pessimistic scenarios Anticipated
Return to BAU/ government response
Initial outbreak 12+ months suppression/ containment New normal
5,000 Full lockdown
• The intensity of subsequent lockdowns
required is driven by the R0
4,000 (reproductive rate of the virus)
ACTIVE CASES (#)
• R0 is highly sensitive to the
pathological characteristics of Covid-19 Ban public events
3,000 (e.g. seasonality, herd immunity) and • Resurgence of Covid-19 is more likely
public health characteristics (e.g. scale during winter due to the potential
& sophistication of testing/tracing) seasonality effect of the virus
School closure
2,000 • There is still high uncertainty around • Further advancements in public
the future effectiveness of containment health tools is likely to lead to more
measures despite ongoing effort controlled outbreaks Social distancing
1,000
Self isolation
0
2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4
10 YoY growth QoQ growth
GDP GROWTH (%)
5
0
-5
YoY GDP worsens from 7% to 12% if a
-10
further lockdown is required this year
-15
2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4
Vw-shape VW-shape
© Oliver Wyman 32SECTOR IMPACT: IMPACT ON THE ECONOMY VARIES BY SECTOR, WITH RESILIENCE IN
SOME KEY SECTORS SUCH AS MINING, CONSTRUCTION AND PROF. SERVICES
Australian GVA by Industry, H1-20 impact of COVID-19
$BN
200 Mining
172 Fin services
146 Construction
Healthcare sector 143 Health Care & Social Assistance
has been significantly
impacted by the 137 Prof. Services
replacement of high 112 Manufacturing
margin elective care 104 Public Admin
with lower margin
COVID care 93 Education and Training
93 Transport & Warehousing
81 Retail Trade
74 Wholesale Trade
69 Admin & Support Services
Large (200+ employees) Subsector impacts vary 57 Rental & Real Estate Services
SME (SECTOR IMPACT: THE PACE AND EXTENT OF RECOVERY ALSO DIFFERS BY SECTOR,
LASTING CHANGES EXPECTED IN HEAVILY IMPACTED SECTORS…
Sector recoveries (based on Vw-shape baseline scenario)
Gradual recovery to new
normal as international
borders open and consumer
confidence recovers
Temporary reinforcement
of restrictions during Real estate
second outbreak Healthcare
Construction
Accom. & food
Lifting of restrictions in June and
reopening of interstate borders in Retail Trade
September drives sector recovery Mining
H1-20 H2-20 H1-21 H2-21 H1-22 H2-22
Industry activity w.r.t pre-COVID levels 90% Inflection point
© Oliver Wyman 34STATE IMPACT: IMPACT AND RECOVERIES DIFFER ACROSS AUSTRALIA, DRIVEN BY
SECTOR SKEW TO SERVICES AND FOREIGN DEMAND
Impact of COVID-19 by state
Gross value added $BN, (% of contribution from services sectors)
WA non-service sector QLD swift recovery when interstate
resilience (incl. mining, agri) borders open due to high interstate
reducing impacts tourism
13% of tourism expenditure 19% of tourism expenditure from
from foreign sources foreign sources
27% education expenditure 37% education expenditure from
from foreign sources foreign sources
4.9% in underemployment rate
$308 BN
4.0% in underemployment rate
(76% services)
$235 BN
SA (56% services) NSW recovery prolonged by high
14% of tourism expenditure $90 BN reliance on foreign demand
from foreign sources (83% services) compared to other states
33% education expenditure $508 BN 27% of tourism expenditure from
foreign sources
from foreign sources (88% services)
5.2% in underemployment rate 44% education expenditure from
foreign sources
4.6% in underemployment rate
VIC recovery prolonged by high reliance on foreign demand compared to other states
37% of tourism expenditure from foreign sources $379 BN Impact measure
46% foreign education expenditure foreign sources (88% services) $27 BN High
(78% services)
5.7% in underemployment rate Moderate
1. Underemployment rate increase from March to April, measure used over unemployment rate due to JobKeeper programme artificially lowering the impact on unemployment rate Low
Sources: ABS - Australian System of National Accounts, 2018-19, Gross Value Added (GVA) by Industry, Parliament of Australia, AUSTrade, Victoria University’s Mitchell Institute
© Oliver Wyman 35MAJOR BANKS HAVE INCREASED PROVISIONING (+40% ON AVERAGE) TO ACCOUNT FOR
THE IMPACT OF COVID-19 AND DEFERRED / REDUCED DIVIDEND PAY-OUTS
Impact of COVID-19 on collective provisioning Banks responses
$M
COVID overlay
COVID overlay/ Pre- H1-20 CP post • Decision to payout dividend at 30c per share (vs.
Bank Report date Weighted Base Severe COVID CP COVID 83c in 2019 final)
27 April 807 363 3,827 22% 4,401 • 51% decline in profits to $1.4 BN
• $3.5 BN capital raising to boost Tier 1 Capital to
30 April 1,031 849 3,002 30% 4,501 11.2%
4 May 1,581 291 3,717 44% 5,182
• Decision to defer dividend (vs. 80c paid in 2019
8 May 582 441 941 61% 1,541 final)
• 60% decline in profits to $1.4 BN
13 May 1,500 Not published 31% 6,400
Impairment charge as % of GLA 3Q20 update figures • Decision to defer dividend (vs. 80c paid in 2019
used, reflective of final)
H2-19 H1-20 COVID impacts • 70% decline in profits to $993 MM
+400%
308% 377% • Decision to payout dividend at $1.80 per share
145%
138%
0.80 (vs. $2.50 in 2019)
0.53 0.62 • 8% decline in profits to $2.7 BN
0.49
0.38
0.16 0.13 0.13 0.20 0.16
• Dividend payments to be reviewed as part of the
1 usual year-end process
1. Westpac results includes AUSTRAC charges
Source: Bank annual and interim reports, media reports
© Oliver Wyman 36COVID-19 RELATED PAYMENT DEFERRALS ARE SIGNIFICANT IN SIZE ACROSS ALL MAJOR
BANKS
Loans deferred1 ($B) Total loans ($B) Deferred home loans by LVR
Report
Bank date Home Business Total Home Business2 Total3
14% 8%
27 April 27 17 44 302 174 619 14%
38% 38%
15%
30 April 36 8 44 264 54 661
4 May 39 8 47 497 122 720
40%
33%
13 May 50 15 65 480 141 770
90%
Loan deferred as a % of total loan value Deferred business loans by sector
14% 14%
13%
12% 23% 20%
26%
31%
9% 9%
8% 8% 4%
7% 7% 7% 7%
3%
18% 8%
15% 10%
13%
6% 9% 11%
Property Healthcare Retail & wholesale Construction
Home loans Business loans Total loans Accom/Food Manufacturing Agri Other
Source: Banks’ latest interim reports;
1. Loan deferred are approved figures for NAB, Westpac, and requested figures for ANZ and CBA; assumption that vast majority of deferrals will be approved;
2. Total loans for business excludes corporates and institutional banking and non-Australian entities; 3. Total includes institutional and non-Australian loans
© Oliver Wyman 37ALL MAJOR BANKS HAVE STARTED MOBILIZING THEIR “CUSTOMER IN DIFFICULTY”
PROGRAMME AMID CONCERNS EQUITY VALUES WILL BE DEPLETED
COVID-19 relief provided by Australian banks1 Banks responses
As of 12 June
772,616 For some business owners, the smartest thing for them to do is to
Total number of COVID-19 loan deferrals wind it up now, and walk away with some equity…
(480,727 mortgages and 215,441 business loans) We have begun resourcing "workout" and restructuring
specialists and would be proactively contacting businesses to
help them arrive at the right solution
$234 BN Mark Hand, Head of retail and business banking
Total value of loans deferred
We recognise that customers may require alternative temporary
assistance measures to help them get back on their feet sooner…
$118 BN We are temporarily allowing existing home loan customers to
New business lending apply for a one-year interest only extension or switch if they are
currently making principal and interest repayments without
Benchmarking of number of loans deferred2 requiring a serviceability assessment
K 215 Angus Sullivan. CBA Group Executive
Eligible customers making interest-only payments will be able to
147 71
136 extend that IO period for up to 12 months, while customers
104 42 31 making principal and interest payments will be able to make the
34 switch to interest-only payments for the same period
144
105 105
70
We are adding 500 staff to our support team to help with
the check-in process and will call customers instead of using
digital communications “to gain a deeper understanding of
Business Mortgages their situation”
Rachel Slade, Chief Customer Experience Officer
1. Australian Banking Association, bank loan deferrals commenced 22nd March 2020; 2. Banks’ latest interim reports
© Oliver Wyman 38THANK YOU; POST-WEBINAR LOGISTICS; Q&A
Contact us
Til Schuermann
Til.Schuermann@oliverwyman.com
Helen Leis
Helen.Leis@oliverwyman.com
Nuno Monteiro
Nuno.Monteiro@oliverwyman.com
Nicholas Tonkes
Nicholas.Tonkes@oliverwyman.com
© Oliver Wyman 39READ OUR LATEST INSIGHTS ABOUT COVID-19 AND ITS GLOBAL IMPACT ONLINE Oliver Wyman and our parent company Marsh & McLennan Visit our dedicated COVID-19 website: (MMC) have been monitoring the latest events and are putting https://www.oliverwyman.com/coronavirus forth our perspectives to support our clients and the industries they serve around the world. Our dedicated COVID-19 digital destination will be updated daily as the situation evolves © Oliver Wyman 40
QUALIFICATIONS, ASSUMPTIONS, AND LIMITING CONDITIONS This report is for the exclusive use of the Oliver Wyman client named herein. This report is not intended for general circulation or publication, nor is it to be reproduced, quoted, or distributed for any purpose without the prior written permission of Oliver Wyman. There are no third-party beneficiaries with respect to this report, and Oliver Wyman does not accept any liability to any third party. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. Oliver Wyman accepts no responsibility for actual results or future events. The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events, or conditions, which occur subsequent to the date hereof. All decisions in connection with the implementation or use of advice or recommendations contained in this report are the sole responsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties. In addition, this report does not represent legal, medical, accounting, safety, or other specialized advice. For any such advice, Oliver Wyman recommends seeking and obtaining advice from a qualified professional.
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