What next as the sun sets on the COVID business support measures? – Guest Blog by Jo Kettner, CEO, Company Watch
24 September 2020
Late September, the sun is still shining and the temperatures a very pleasant mid-twenties Celsius. You could be forgiven for thinking that all was right with the world, but as we know, a perfect economic storm is brewing.
Over the next four weeks we will see the Government-funded Coronavirus Job Retention Scheme (CJRS) come to an end, after providing more than 6 months’ lifeline to keep employees on the payroll. With an estimated 3.6m jobs still using the furlough scheme and over 700,000 jobs already lost between March and July 2020 we should not under-estimate the impact that the end of CJRS will have on people’s livelihoods. The UK is primarily a consumer-driven economy, so the rise in unemployment and uncertainty among those who are fortunate enough to remain in work will undoubtedly pile more pressure on already fragile sectors including retail, hospitality, and travel. The publication of the Internal Market Bill and threat of a major show-down between the UK and EU as trade talks reach crunch point will do little to improve confidence of business or consumers.
Of course, many businesses will have benefited from some relief through the business rates holiday, more time to pay VAT, temporary measures to prevent landlords from enforcing lease forfeiture clauses, grants and loans, but with these schemes all come to an end over the coming months what can credit risk managers expect?
This perfect storm, playing out through the ongoing pandemic, and with the threat of a no-deal Brexit still looming large, puts most forecasts at around an 11-12% GDP contraction with, according to the McKinsey Global Institute and Oxford Economics, risk cost margins almost doubling from a 2011/12 crisis measure of 93 to 167 basis points for 2020-21.
Acute shock, where will it be felt?
So where will the shock be most acute? It’s reasonable to say that few, if any, sectors will be immune but those which seem particularly exposed to the highest shock intensity are leisure, hotels, transport, catering, retail, automotive. Some of these sectors have benefited from short term stimuli. “Eat out to help out” (EOHO) has driven great demand in the hospitality sector. Automotive has seen a sharp increase in demand driven by factors like spending swaps (car instead of holiday), lease contract renewals, and new season plates from 1st September but while welcome, these might appear to be temporary conditions. EOHO has now ended, with some venues discounting to try and maintain the momentum, but impending restrictions on the hospitality sector due to be announced on 22 September will surely not help this sector. The European car manufacturing sector is predicted to face a 16% YoY decline according to a research firm, (Counterpoint, Sept 15th, 2020).
The McKinsey research goes on to suggest that the biggest risk sector in terms of prospective corporate business failures will be the passenger transport sector with failure multiples of 16x. In the SME space then the retail sector is predicted to fare the worst at 6x multiple risk of failure.
So what can credit risk managers do to adapt to this set of conditions? The report sets out the following five steps as the key changes to credit-risk management.
A significant part of the armoury for a credit risk manager is access to a credit score and report, and while these are still essential tools, they aren’t sufficient in a static context. What the McKinsey work continually emphasises is the increased need to mine and analyse data sources in new ways to try and pre-empt and predict the likely performance of a sector, or sub-sector. In this regard it is vital that your data source providers play their part and give you the ability to conduct this pre-emptive analysis.
Are you alone? Or will the global financial system help?
A major consequential effect of what we face is procyclicality. Like someone who is recovering from serious injury, there is a moment when the crutches have to go and normal functioning takes over, similarly as Government intervention rolls back, the finance and banking systems must take over.
As KPMG states in their report, Managing credit risk and capital, “Managing the effects of the crisis on credit risks and capital levels is now a top priority for every bank.” And the challenge for banks in this process? Well that depends on the banks’ ability to judge the impact of COVID-19, in other words no-one has any greater or lesser insight (or foresight if you wish) as to the best levers to pull or sources to turn to as all businesses navigate the next months and years.
While KPMG suggest sectoral portfolio analysis and identifying those most likely to have viable and sustainable business models and therefore better candidates for moratoria and support, they also state that, “it is essential that banks focus on the quality of their data and IT systems.” But those who are relying simply on SIC codes to determine the industry sector should beware of the pitfalls that lurk in such a notoriously unreliable data point.
So, good quality data, including those important credit scores and reports, is shaping up to be the ‘oil strike’ necessary to navigate credit-risk over the coming months and years. Whether this is the scarce pertinent data hinted at by McKinsey, or the sectoral clues that KPMG are advising banks to seek. And for the data providers, it will not be just the provisioning of data, but the tools to help credit-risk managers manipulate and analyse the data to find the best answers to keep credit moving, and risks managed.
It’s always darkest before the dawn
Or so the saying goes. There is no doubt that by any measure, we are about to enter a very turbulent 12 months or more as the consequential chain of events, started by the removal of government support begins. Through most recessions of the twentieth and twenty first centuries banks, businesses, governments, had some idea of the course, in the case of COVID-19 this really isn’t the case. It feels as though we are back in the days of the early modern cartographers, who, when charting dangerous or unexplored territory would mark simply: ‘here be dragons’. The course through these turbulent months ahead will throw up new challenges and stress systems, and processes: but it will undoubtedly be the ability to access, analyse and make accurate predictions on the data as it emerges, that will separate those who are able to chart the course out from those who get lost at sea.
Jo Kettner, CEO, Company Watch
- https://www.mckinsey.com/business-functions/risk/our-insights/managing-and-monitoring-credit-risk-after-the-covid-19-pandemic [accessed 21/09/2020]
- https://home.kpmg/xx/en/home/insights/2020/04/mitigating-credit-risk-and-capital-procyclicality-in-the-context-of-covid-19.html [accessed 21/09/2020]
- https://www.counterpointresearch.com/weekly-updates-covid-19-impact-global-automotive-industry/ [accessed 21/09/2020]