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Article | Executive Pay Memo North America

Banking industry resilient so far, but challenges lie ahead

Executive Compensation
COVID 19 Coronavirus

By Daniel Potter and Arpha Suwansatisakorn | June 24, 2020

Banks entered the shock from the COVID-19 pandemic on much firmer footing than the previous financial crisis, but they are not out of the woods yet.

In 2008, the banking industry faced an existential threat as excessive risk-taking caused a financial crisis that hurtled the global financial system toward collapse. After the crisis and subsequent wide-ranging taxpayer bailouts made to save many major banks, vast global regulatory changes were put into place to force banks to increase their capital strength, reduce risky business activities and significantly improve internal controls to safeguard against future crises. While the present day’s tighter regulations have in some ways reduced banks’ ability to earn outsize profits, it is clear so far that banks have withstood the initial economic shock caused by the COVID-19 pandemic.

As the pandemic spread and economic activity in many countries ground to a halt due to government-mandated shutdowns, many large companies aggressively drew down their bank credit lines to raise cash as they braced for the worst. Global stock markets were in free fall, while at the same time an extreme lack of liquidity manifested in credit markets as individuals and institutions sold everything from stocks and corporate debt, to super-safe assets such as government bonds and gold, to raise cash. The swift actions of the Federal Reserve and other central banks are widely regarded as having helped avoid the liquidity crisis from becoming a full-blown financial crisis. The Fed lowered its interest rate target to near zero, implemented sweeping new emergency lending facilities and committed to an unprecedented volume of asset purchases to restore some semblance of normal functioning to the markets.

As the economic shutdowns and severe financial shock around COVID-19 took place late in the first quarter of 2020, it will be some time before the impact is fully reflected in bank financial results; however, the following trends are apparent so far:

  • Revenue trends will vary significantly by business. Banks’ trading desks have indicated significant gains due to increased client activity around the market volatility, but the M&A and capital-raising businesses will likely see significant revenue declines. The corporate lending business has seen a large increase as companies have drawn down credit, while consumer lending is likely to decrease as banks tighten up their lending standards.
  • Most banks significantly increased their provisions for credit losses (bad loans) in the first quarter, a trend that will likely continue into the second quarter and beyond, taking a significant chunk out of profitability. For now, enhanced unemployment benefits and payment deferrals on consumer credit, including mortgages, have helped to avoid a crush of consumer loan delinquencies. The pace and strength of economic recovery juxtaposed against the breadth of any further government stimulus will be critical to maintaining the health of the household balance sheet and thus of banks’ consumer credit portfolios.
  • Regarding employee compensation and benefit accruals, banks at Q1 2020 largely maintained funding levels similar to historic norms when viewed as a percentage of revenues before bad loan provisions. History tells us, however, that overall compensation pool accruals, and specifically the bonus pool accrual, will generally decrease on an absolute basis in a declining performance environment, though it may increase on a percentage basis as accruals do not fall quite in lockstep with the revenue and profitability decrease.
  • American banks have for now largely maintained their commitment to pay dividends and have not come under regulatory pressure to halt such payments, lending further credibility to their apparent strong capital position and ability to withstand the current shock. This contrasts with the situation in Europe, where banks have come under regulatory pressure to cancel dividend payouts and use “extreme moderation” on bonus payouts for 2020, especially for executives.

Financial outlook for 2020

Analysis of financial results, forward-looking analysts’ expectations, plus growth and profitability targets have clearly been muddied by the pandemic-related economic shock. The table below shows 2019 fiscal-year financial results and analysts’ expectations on key financial measures as they were at the beginning of 2020 as well as at present date:

Banking industry

FY 2019     Estimate as of
Measures 1/6/2020 6/8/2020
Return on equity 10.1%  10.1%  6.2%
Revenue growth 5.2%  1.2%   1.3%
Earnings per share growth (EPS) 4.7% – 1.6% – 39.0%
Total shareholder return (TSR)1 24.8% – 22.1%

Source: S&P's Capital IQ database

1,TSR as of 6/8/2020 is actual

Analysts’ expectations have taken a negative turn as a result of the pandemic. Top-line revenues (pre-credit loss provision) will be nearly flat at median but will vary significantly among firms according to their business mix. Profitability metrics such as return on equity as well as earnings per share (EPS) growth are expected to be significantly negative due to the impact of credit loss provisions on profitability, while compensation and benefit accruals will likely trend down only slowly, putting further pressure on profits.

The impact on long-term incentive payouts for bank senior executives is difficult to gauge at this point. On the one hand, executives at many banks may benefit from stock awards from prior plans made during the market downturn if share prices ultimately bounce back. Indeed, the broader stock market, including bank stocks, has staged a remarkable comeback from the lows reached in mid-March. On the other hand, the performance targets for “in-flight” awards may prove largely impossible to reach given current dynamics. It remains to be seen what, if any, discretionary adjustments will be made by compensation committees for such in-flight awards to account for this; the answer is likely to vary significantly between banks.

Human capital response

Banks have additionally taken a number of actions relating to the broader employee population as a result of the COVID-19 pandemic, the most common including:

  • Transitioning a majority of the workforce to remote settings
  • Committing to maintain current staffing levels for the duration of the pandemic (i.e., no layoffs)
  • Continuing pay and benefits to hourly staff and extensions of paid leave
  • Providing special bonuses and/or additional pay to frontline workers

While many banks have imposed freezes on staff reductions for the duration of the pandemic, the impact of continued improvements in technology and automation of processes is still likely to lead to redundancies in the mid to longer term.

Additionally, several major banks have recently spoken out, and some pledged financial commitments, to help fight racial inequality and racial bias, issues that have been brought to the forefront by the economic disparities exacerbated by the COVID-19 pandemic and the recent widespread protests and social unrest as a result of the death of George Floyd. The responses to these current events serve as further affirmation that the concept of “stakeholder capitalism,” in which corporations are oriented to serve all stakeholders, including customers, employees, shareholders and local communities, is here to stay.


Lead Associate, Executive Compensation  (New York)

Lead Associate, Executive Compensation (New York)

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