By Vivian Merker, Ege Gurdeniz, Taylor Davies, and Sam Taylor.
This article was first published on April 27, 2020.
As the number of cases of the Coronavirus (COVID-19) increases, the focus of companies continues to be on limiting the direct impact on employees and customers whilst supporting efforts to limit the spread of the virus.
The healthcare sector, airlines, travel firms, and supermarkets have seen immediate impacts, and face a significant challenge over the coming months to respond effectively to the emerging crisis. As we outlined in a recent publication, Responding to COVID 19: Six Things Banks Should Do To Minimize The Impact To The Economy, it is the financial services industry that may have the greatest single influence on the global economy, and how businesses and consumers are affected by the pandemic.
Against this backdrop, firms are already starting to see early impacts of COVID-19 as cash flow pressures increase. Even at this relatively early stage in the outbreak, our analysis suggests that the impact of falling interest rates, reduced economic activity, expense increases (for example additional customer support and increased resilience requirements), will present a significant challenge. In certain cases increases in loan provisions for banks, and business interruption claims for commercial insurers, are already impacting profitability. All of this is on top of the pre-existing commercial difficulties for the industry brought about by pervasive low interest rates and increased market disruption from newer competitors.
The question for the industry is whether it responds in a way which amplifies or dampens the acute economic damage from COVID-19. Inevitably, institutions will need to approach the cost containment question – how they do this will, in part, determine which firms will be most successful emerging from the pandemic.