May 22 (UPI) -- Banking institutions around the world are likely to face pressure on profit margins in the coming years due to the sharp and abrupt strain brought on by the coronavirus pandemic, the International Monetary Fund said in an outlook Friday.
In its latest Global Financial Stability Report, IMF analysts warn that financial vulnerabilities that built up over a decade of extremely low interest rates and increased market volatility are now being disrupted by economic fallout from the pandemic.
Banking profits, it says, will be squeezed in the coming years by a "persistent period of low interest rates."
The IMF report said simulations conducted for a group of nine advanced economies showed that a large fraction of their banking sectors may fail to generate profits above their cost of equity in 2025.
"Once immediate challenges recede, banks could take steps to mitigate pressures on profits, including by increasing fee income or cutting costs, but it may be challenging to fully mitigate profitability pressures," it states.
"Over the medium term, banks may seek to recoup lost profits by taking excessive risks. If so, vulnerabilities could build in the banking system, sowing the seeds of future problems."
The IMF said governments can help stabilize unprofitable banks by removing "structural impediments to bank consolidation" and incorporating risk assessments and supervision suitable for "a low-interest-rate-environment scenario."
The global banking sector has already seen substantial harm from the global health crisis.
HSBC, Europe's largest lender, reported that profits in the first quarter of 2020 were down almost 50 percent from $6.2 billion to $3.2 billion year-to-year. It set aside $3 billion to cover loans that are unlikely to be repaid.
Germany's Deutsche Bank warned last month its first-quarter profits are down from $201 million in the first quarter of 2019 to $72 million in Q1 2020.
"Policymakers should now act decisively to contain the economic fallout of COVID-19 and support the flow of credit to firms," the IMF report says. "Once the crisis is over, they should assess the sources of market dislocations and tackle the vulnerabilities that have been unmasked by this episode."