Moody’s Warns of “Unprecedented Credit Shock” Worldwide

For the rating agency, the spread of the coronavirus and falling oil prices deepened the deterioration of the economic outlook

The US rating agency Moody’s warned of the accelerated spread of the coronavirus and the sharp drop in oil prices, which deepened the deterioration of the economic outlook and a “great upheaval in the financial market”, leading to “an unprecedented credit shock ” around the world.

Moody´s said that the situation affects all sectors of the real economy and warns that this will have in financial institutions that are currently giving credits and injecting money into companies, many of which do not know if they will be able to return the money.

The agency indicated that the income of the banks will be “strongly” reduced and the provisions for non-performing loans will increase, however, it highlights that this will have an impact on the results and not on the capital, which will remain “intact” after substantially improving since the financial crisis of 2007-2008.

The profitability of investment banks in the United States is more sensitive to the situation than that of European competitors, argues the agency, which nevertheless recalls that they start from a stronger position.

This situation occurs because the loss of income will be more pronounced in the activities of the capital markets, as well as in the management of assets and wealth, more typical of investment banking than of retail banking, predicts Moody’s.

That will translate into significant revenue declines for entities like Credit Suisse, Goldman Sachs, Morgan Stanley and UBS.

More diversified banks such as BNP Paribas, HSBC and Société Générale, however, believe they are better prepared to resist rising delinquencies and falling business due to the sudden decline in economic activity and the rapid rise in unemployment.

Citibank would be the most affected bank for Moody’s: the losses of its credit portfolio would absorb almost 100% of the group’s pre-tax profit in 2019.

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