Bankers are beginning to worry that a surge in new coronavirus cases in states that were quick to reopen will make it tougher for the economy to find its footing again.
States like Texas, California, Florida and Arizona have been setting new daily records for cases this week, with some seeing numbers double from just last week, according to state health department data.
As a result, some banks are beginning to rethink their own opening plans, while considering boosting already elevated loan-loss provisions to guard against the possibility that many loans to households and businesses will not get repaid.
Texas is pausing further phases of its reopening plans, Republican Gov. Greg Abbott said Thursday. California Gov. Gavin Newsom, a Democrat, said on Wednesday that his state was not yet ready to take that step. Florida Gov. Ron DeSantis and Arizona Gov. Doug Ducey, both Republicans, are still moving ahead with reopening plans for now.
The $17.2-billion-asset Cadence Bancorp has the ninth-highest deposit share in the Houston market, according to Federal Deposit Insurance Corp. data. Houston-area intensive care unit beds reached 97% capacity on Wednesday as some hospitals there have exceeded capacity because of the outbreak.
Five of Cadence’s 1,800 employees have been diagnosed with COVID-19, and one of the bank’s workers is in the hospital with the disease, Paul Murphy, the chairman and CEO of the Atlanta-based Cadence, said in an interview. He added that his own projections for pandemic has whipsawed from a “disaster scenario” in March to some optimism for a rebound to now landing somewhere in between the two.
“It’s highly alarming,” he said. “The world got a little complacent and we put our guard down a bit and we’re seeing the results.”
Cadence, like other banks, already set aside $83.4 million in loan-loss provisions during the first quarter, compared with $27.1 million in the fourth quarter of 2019.
“Does that impact provision over time? Yeah, sure,” Murphy said about the change in projections for the virus’s spread. “The rest of the year will be a period of elevated provisions for the industry as the risks will be better estimated.”
Adrian Casillas, a junior economist with Houston-based BBVA, said in an interview that the surge in cases “will almost certainly defer the recovery” whether governments shut local economies down again or consumers in these states choose to stay home on their own. Casillas estimates a full recovery in some areas may not happen until late 2022 or even into 2023.
“It’s very likely that an early reopening did more economic damage in the long run than a more gradual landing as in recovered countries,” Casillas said, adding that a large increase in business inventories will “kneecap suppliers who followed the more optimistic recovery schedule.”
Brian Klock, an analyst at Keefe, Bruyette & Woods, said in an email that banks will feel a slew of impacts if reopenings are delayed because of the spike in cases. Fee income could take another hit as waivers that banks previously provided for debt payments are extended again, and the piles of deposits that flooded into banks at the start of the crisis could start to draw down as emergency funds are depleted.
“The bigger issue will be on the potential provision/reserve build,” Klock said.
The expectation remains that the second quarter will be the peak for reserve builds in the banking industry, but if the economic outlook worsens because of delayed openings, provisions could climb even higher, Klock said.
Community Valley Bank is headquartered in Imperial County, Calif., a largely rural area near the Mexico border. Imperial County has by far the highest per capita rate of COVID-19 cases in the state, according to data from the California Department of Public Health.
Jon Edney, the CEO of the $209 million-asset bank, said coronavirus cases began to surge in Imperial County around the same time that authorities were starting to allow businesses to open their doors. At local businesses, revenues have yet to rebound from the slump that began in March, he said.
“Most of our customers are businesses, and obviously it’s a huge challenge,” Edney said. “The surge is keeping things closed.”
Employees of the small bank worked long hours this spring to process nearly 300 loans under the Paycheck Protection Program. But Edney said that businesses that received those forgivable loans are going to be forced to start laying off employees soon, since the program was designed to cover only about 10 weeks of payroll costs.
On Wednesday, one small-business customer told Edney that he has already burned through $50,000 in personal savings, and that while his business is collecting some revenue, it is not enough to avoid layoffs.
“We think the unemployment numbers are huge today,” Edney said in an interview Thursday. “What’s going to happen come middle of July?”
Edney would like Congress to allocate more money for small-business relief, but in a way that targets specific industries that have been particularly hard hit. He cited restaurants, hair salons and certain medical providers, which have seen business slow down because patients worry about catching the virus, as examples.
“It’s a tough time, and there has to be more consideration for solutions that are going to be direct to certain types of businesses,” Edney said.
Kurt Spieler, chief investment officer at First National Bank of Omaha’s wealth management business, said he expects Congress to pass another stimulus plan this summer.
“The recent surge in cases increases the odds this will happen, in our opinion,” Spieler said. “We also believe the level of stimulus activity may be higher as a result of increased pain that individuals and businesses are experiencing.”
Chris Nichols, chief strategy officer at the $35 billion-asset South State in Winter Haven, Fla., said the recovery will be delayed because of the recent surge in cases within some states that were quick to reopen. He estimates there will be a need of at least $600 billion in further government stimulus, which could double if the transmission rate of the virus is not kept under control soon.
“In all past recessions, recovery was somewhat predictable,” Nichols said. “Now, that is not true as there is not only health and policy considerations to estimate, but [a presidential] election, which creates another layer of uncertainty on how to forecast. This combination of factors is causing deep confusion among credit administrators.”
Kevin Wack contributed to this story.