COVID-19 came as a surprise and a shock to the whole world. It also affected the financial sector badly. The pillars of the economy, the banking sector, and the stocks were also deeply impacted.
In this article, we will see how the profitability and valuation of the banking sector were affected. Also, we will see how stocks and online trading did during these troubled times.
How COVID-19 affected the banking sector
Banks faced true turmoil during the pandemic-hit period. With the outbreak of novel coronavirus (COVID-19), millions lost jobs, many businesses closed, sales plummeted worldwide, and profits slumped. Besides, the income of people as a whole went down. As expected, many customers sought help with their only source of money-the banks.
Apart from the financial impact, banks also had to ensure their employees and customers were safe from the virus. For this, they all had to adopt preventive measures, like social distancing. Remote working was a common norm adopted by many banks across the globe. This reduced the crowds inside banks and helped maintain a high vigil in the bank vicinity.
For the customers, more and more emphasis was placed on digital transactions and cashless payments. Banks employed more digitization and enabled remote transactions for extra safety. This was inevitable in the face of the uncertainty that clouded all outdoor spaces at the time of the primary spread.
Deeply impacted areas of finance
1. Profitability
COVID-19 undoubtedly reduced the core profitability of banking even in developed markets. As a result, many financial institutions shifted to a commission-based income model for tech business and payments.
One of the quickest impacts of health emergencies in the global economy was the heightened credit risk for retail and corporate clients of banks. To keep the financing intact and to ensure recovery, banks had to separate temporary and permanent phenomena. The former included events with impacts that got absorbed fast, but the latter needed management support for its recovery.
The way in which events were considered changed. For instance, futuristic information was processed differently. More care went into analyzing the nature of the coronavirus, and it lasted for a short period driven by the short-term impacts on the economic front.
Default rates underwent revision and the accounts eligible for waivers had to be examined again. Waivers were provided to only those temporary actions, that too upon the expiry of credit.
The contraction of economic activity had a negative impact on credit quality because banks raised loan loss provisions. Besides, some European banks posted major losses during the crisis from January to March 2020. They felt a rise in the number of bad loans.
2. Depression of banks’ valuation due to stock market volatility
COVID-19 made many of the online trading pathways and global markets unstable and volatile. As the financial sector was among the worst affected fields, all nations across the world felt the impact. And the condition of banks in these countries was no different either.
Banking stocks took huge blows during the spread of coronavirus. During the time between 1st December and 30th April, many banks witnessed significant slumps. European banks felt the blow too, and it reflected in the Euro STOXX banks. It displayed a major decline of 40.18%. Meanwhile, STOXX North America 600 banks index declined by 31.23%, and STOXX Asia/Pacific 600 banks index fell by 26.09% during the trouble quarter.
How COVID-19 affected the stock market
The stocks were, without a doubt, destabilized during the COVID-19 pandemic. They went highly volatile, making online trading a bumpy ride for inverters. Here are some of the key takeaways from the performance of stocks during this period:
1. The initial phase of the pandemic went fairly stable until February of 2020. But, as the number of casualties rose, stock markets reacted. Before March 2020, stocks were highly volatile due to the uncertainty that was spreading fast. However, after the central banks stepped in for relief from March to April 2020, a major part of the fear vanished. Shareholders stopped fearing the health emergency, and the process bounced back across the globe.
2. How a country fared in its battle against the pandemic mattered little in the online trading front. Because a country was severely affected didn’t mean it would slump in the stock market. The economic weakness or transmission risk played a less prominent role in deciding the fate of stocks than was expected at the beginning. For instance, a country with huge debts didn’t always end up the worst performer. Similarly, a country with a high population and transmission risk wasn’t always a low-baller in online trading.
3. Investors remained aware of the extent of COVID-19 spread in the neighborhood of their nations.
4. The decline in stock prices, where it was felt, came about due to government measures like lockdown rules, reduced policy interest rates, and governmental guarantees.
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