WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEM - Epidemiology, Insurance, CARES Impact, Resiliency, Paycheck Protection Program - Oliver ...
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WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEM Epidemiology, Insurance, CARES Impact, Resiliency, Paycheck Protection Program April 8th, 2020
CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information. Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman. © Oliver Wyman
OUR PANELISTS
Til Schuermann Kristin Ricci
Partner, Risk & Public Policy Partner, Insurance
New York Washington, DC
Helen Leis Dylan Walsh
Partner, Health & Life Sciences Partner, Corporate &
New York Institutional Banking
New York
Vivian Merker
Scott Campion
Partner, Digital & Retail and
Partner, Insurance
Business Banking
New York
New York
© Oliver Wyman 3
WEBINAR AGENDA 01 Epidemiologic Perspectives 10 min 02 Impact on the Life Insurance Industry 10 min 03 CARES Act, Fed Programs and Macro Roll-up 10 min 04 Resilience of Wholesale Banks 10 min 05 CARES Impact on Small Business Lending 5 min 06 Additional Q&A Remaining time © Oliver Wyman 4
01 EPIDEMIOLOGIC PERSPECTIVES Panelist: Helen Leis
Information as of 4/7/20
COVID-19 SPREAD GLOBALLY
As of April 7rd, 2020
• ~1.4M cases reported in 181
countries and territories
• ~81K reported deaths
80k
• First reported in Wuhan,
China, on December 31,
2019
• Declared a global
pandemic
by the World Heath
Organization
on March 11, 2020
1. Countries included: All Countries in “European Region” Sub-region in WHO Situation Report
Source: Map from CDC (link), Numbers from John Hopkins University & Medicine (link)
© Oliver Wyman 6
Information as of 4/5/20
SUMMARY UNDERSTANDING OF COVID-19 FACTS
Key facts Implications
Contagion • R0 for COVID-19 is currently estimated at between 2 and 3 COVID-19 is twice as contagious as the seasonal
(with edge of range estimates closer to 1.4 and 3.6), which flu
means each person infects 2-3 others3; R0 for the seasonal flu
is around 1.34
Current lack of • No herd immunity exists yet as the virus is novel in humans Social distancing (quarantines, WFH, school
immunity • Unclear to what extent natural infection will provide closures) is the only “brake” to slow the spread
immunity, and for how long
Incubation period • The incubation period is a median of 5.5 days (up to 14 People are contagious for longer periods than
days)1, 10, while the annual flu is commonly a 3-day period1; the flu or other illnesses, requiring longer bouts
data suggests that viral shedding continues beyond symptom of quarantine to truly suppress spread
resolution for 6-12 days6
Fatality • Case fatality rates are trending at 5.7% globally8 (vs. 0.1% for Fatality is orders of magnitude higher than
the flu)9 typical influenzas
Portion of cases • COVID-19 can be spread asymptomatically5 People who feel “fine” are capable of – and are --
asymptomatic but • Of those people tested and confirmed positive for COVID-19, transmitting COVID-19 to others
contagious experts estimate 18-30% are asymptomatic, with another 10-
20% with mild enough symptoms to not suspect COVID-1911
• Early indicators from comprehensive testing of small
populations (e.g., Vo, Italy; Iceland) suggest as many as 50%
of cases could be asymptomatic12
Portion of cases • Approximately 19% of confirmed cases are considered Hospital systems risk being overtaxed (ICU beds,
reaching “critical” “severe” or “critical”, requiring hospitalization, and 1/4th of ventilators, PPE) meaning case fatality rates
/ “severe” those need ICU beds7 could rise further
infection
1. CDC. 3. The R0 for the coronavirus was estimated by the WHO to be between 1.4 -2.5 (end of January estimate) (link), other organizations have estimated an R0 ranging between 2-3
or higher (link); 4. CDC Paper (link); 5. JAMA. “Presumed Asymptomatic Carrier Transmission of COVID-19” 6. MedRxIv. “Clinical presentation and virological assessment of hospitalized
© Oliver Wyman cases of coronavirus disease 2019 in a travel-associated transmission cluster”. Mar 8. 2020. 7. China CDC, JAMA (link). 8. JHU. 9. CDC. 10. Annals of Internal Medicine (link) 11. Nature 7
article (link), Eurosurveillance Paper (link) 12. ZMEScience report (link)Information as of 4/6/20
MANY COUNTRIES CONTINUE TO SEE NEARLY EXPONENTIAL GROWTH; CHINA AND
SOUTH KOREA HAVE FLATTENED THE CURVE
Cumulative confirmed cases by country
Log scale • Lack of broad testing early, followed by rapid ramp-up
may explain part of steep growth rate
1,000,000
• Response left largely to individual states
• More than half of states implemented state-wide stay
at home orders between March 19 and April 1
US ESP GER IT
100,000 CHINA
• Initial ring-fencing limited to Lombardy, at 8k cases
FR (day 15 in chart), with ongoing travel still permitted
• Broader shutdown at 12k cases (day 17 in chart)
UK
S. Korea
10,000
• Enforced city-wide quarantine of Wuhan post-outbreak
• Early containment outside Hubei halted growth
China Spain
CZE • Mobile monitoring / enforcement (via WeChat, etc.)
France UK
1,000 Germany US
• Massive early testing (as of 3/28, >6.5k tests per million
Italy CZE vs. US estimated ~2k tests per million people)
South Korea • Quarantined patients monitored via mobile app
• Epidemic response in place from SARS outbreak
100
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75
Days since 100th confirmed COVID-19 case
Sources: JCSSE (Johns Hopkins), local news and county health departments, as of 3/17. Pre-WHO China data from NHC) Containment sources: China, S. Korea, US and testing stats, Italy
100th case on: Italy: 2/23, S. Korea: 2/20, US: 3/3, China: before 1/18, UK: 3/5, France: 2/29, Germany: 3/1; Spain 3/2, Czechia: 3/13. Data from JHU 4/7/2020.
© Oliver Wyman 8Information as of 4/6/20
THE CASE COUNT OF COVID-19 CONTINUES TO GROW ACROSS THE UNITED STATES
Confirmed Cases by US Metro area
Log scale
100,000 New York City (5 Boroughs)
Philadelphia (5 Counties)
72,181
Boston (MSA)
Miami (MSA)
New Orleans (MSA) 14,111
11,990
San Francisco (MSA) 10,273
10,000 Los Angeles (MSA) 9,917
6,589
Chicago (MSA) 7,828 7,242 5,407
Seattle (MSA)
Detroit (MSA) 2,312 2,311 2,310
Metro area Case Fatality Rate
Houston (MSA) NYC 4.6%
PHL 1.2%
Dallas (MSA) BOS 1.5%
1,000 MIA 1.8%
NOLA 3.7%
SF 2.2%
LA 2.2%
CHI 2.5%
SEA 5.3%
DET 4.5%
HOU 1.3%
DFW 1.9%
100
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Stay home
orders HOU SF DFW, MIA NYC BOS SEA
PHL, NOLA,
LA
CHI, DET
Days since 100th confirmed COVID-19 case
Data: USA Facts County Level Data. Stay at home orders data from New York Times.
© Oliver Wyman 9Information as of 4/6/20
CASE FATALITY RATE (CFR) BY COUNTRY
While the global CFR is a useful metric to understand COVID-19, country-specific CFRs range by an order of magnitude
CFR by country1 What is driving the variation?
13% 12.47% • Position along the trajectory of the outbreak:
12% For many countries (e.g., Europe, US), the vast
majority of cases have not yet resolved and the
11%
10.30% CFR is changing rapidly
10% 9.76%
• Breadth of testing: Broader testing leads to a
9.02% larger confirmed base of patients, decreasing
9%
CFR
8%
• Distribution of key risk factors within the
7% population: Age, gender and pre-existing
conditions have a significant influence on
6% 5.54%
mortality (see next page); countries with higher
5% 4.74% CFRs have a population skewed towards these
risk factors (e.g., Italy has the second oldest
4%
population on earth)
2.94%
3% • Health system threshold: Every country has a
2% 1.62% 1.75% 1.81% health system capacity, that when exceeded,
will result in the inability to provide sufficient
1% 0.83% support to all patients thereby resulting in a
0% higher CFR
China CzechiaGermanyS. Korea US Hubei France Spain UK Italy Global
excl.Hubei
Note that case fatality rates are still unstable as greater than 80% of cases outside of China are still active
1. Calculated as Number of Deaths / Total Confirmed Cases as reported by Johns Hopkins University
© Oliver Wyman 10Latest data available, varies by country
CASE FATALITY RATE (CFR) BY PATIENT CHARACTERISTIC
Significantly higher death rates occur among the elderly and those with underlying conditions
Case Fatality Rate by Specific Patient Characteristics
by Age1,2,3 by Comorbid Condition1
22%
China 16%
20%
Italy
18% 14%
Spain
16% S. Korea 12%
14%
10%
12%
10% 8%
8% 6%
6%
4%
4%
2%
2%
0% 0%
80+ 70-79 60-69 50-59 40-49 30-39 20-29 10-19 0-9 Cardio- Diabetes Chronic Hyper- Cancer None
vascular respiratory tension
disease disease
1. China data as of 02/11/2020 (link) 2. Italy data as of 03/17/2020 (link) 3. S. Korea data as of 03/24/2020 (link) 4. Spain data as of 03/24/2020 (link)
Notes: Data from China includes 72,314 confirmed cases reported through February 11, 2020, which is the latest data available as of 3/23/20.
© Oliver Wyman 11PREDICTING PEAKS, AND POST-PEAK TRAJECTORIES
OW COVID-19 Pandemic Navigator
The Navigator reveals where containment and suppression efforts are working, including first peaks and post-first-peak trajectories on a
regional basis.
Registration link for new users: https://oliverwymangroup.wufoo.com/forms/s12hwj5h0qqcxx1/
© Oliver Wyman 12COVID-19 PROJECTIONS– NEW CASES
60000
Forecast launch date
50000
40000
30000 US (>80% states “stay
at home” order)
4/3
20000
National lockdowns China changes
Wuhan methodology for Italy Spain Germany
10000 confirmed cases
1/23 3/9 3/14 3/22
0
1/22 1/29 2/5 2/12 2/19 2/26 3/4 3/11 3/18 3/25 4/1 4/8 4/15 4/22 4/29 5/6
China (actual) China South Korea (actual) South Korea
Italy (actual) Italy US (actual) US
Spain (actual) Spain Germany (actual) Germany
United Kingdom (actual) United Kingdom
© Oliver Wyman 13COVID-19 PROJECTIONS – NEW CASES (EXCLUDING U.S.)
16000
China changes
Forecast launch date
methodology for
14000 confirmed cases
12000
10000
8000
National lockdowns
Wuhan Italy Spain Germany
6000 1/23 3/9 3/14 3/22
4000
2000
0
1/22 1/29 2/5 2/12 2/19 2/26 3/4 3/11 3/18 3/25 4/1 4/8 4/15 4/22 4/29 5/6
China (actual) China South Korea (actual) South Korea
Italy (actual) Italy Spain (actual) Spain
Germany (actual) Germany United Kingdom (actual) United Kingdom
© Oliver Wyman 14COVID-19 PROJECTIONS – ACTIVE CASES
900000
Forecast launch date
800000
700000
600000
500000
US (>80% states
400000 shelter in place)
4/3
300000
National lockdowns
200000
Wuhan Italy Spain Germany
1/23 3/9 3/14 3/22
100000
0
1/22 1/29 2/5 2/12 2/19 2/26 3/4 3/11 3/18 3/25 4/1 4/8 4/15 4/22 4/29 5/6
China (actual) China South Korea (actual) South Korea
Italy (actual) Italy US (actual) US
Spain (actual) Spain Germany (actual) Germany
United Kingdom (actual) United Kingdom
© Oliver Wyman 15COVID-19 PROJECTIONS – ACTIVE CASES (EXCLUDING U.S.)
120000
Forecast launch date
100000
80000
60000
40000 National lockdowns
Wuhan Italy Spain Germany
1/23 3/9 3/14 3/22
20000
0
1/22 1/29 2/5 2/12 2/19 2/26 3/4 3/11 3/18 3/25 4/1 4/8 4/15 4/22 4/29 5/6
China (actual) China South Korea (actual) South Korea
Italy (actual) Italy Spain (actual) Spain
Germany (actual) Germany United Kingdom (actual) United Kingdom
© Oliver Wyman 16HOW LONG WILL SUPPRESSION TAKE? HOW WILL IT PLAY OUT?
Several archetypes of local pandemic progression patterns have emerged
No clear date to relax
Local pandemic progression archetypes1 suppression
8k
6k
4k Wuhan beginning to relax
suppression ~10 weeks post
2k peak
0
Norway ~ 4+ weeks Hubei ~ 7-8 weeks Italy ~ 7+ weeks
Case growth flattened Sharp peak of very high Sharp incline, followed
immediately, no “peak” case load, sharp decline by plateau
Regardless of Archetype: When is it safe to begin relaxing suppression?
Time Capacity Tools
• New cases have been consistently • Healthcare providers can treat all admits, • Readily available, rapid testing at POC
declining for at least two weeks: i.e. R0 COVID-19, projected normal volume, and (requires staff, infrastructure, and testing
below 1 for a full incubation period potential pent-up demand surge without capacity)
reverting to crisis care
• Early hot spots, China, Czech Republic, • Broad serological testing
South Korea, are just beginning to • May require health facility upgrades to
• National infection tracking system (extensive
experiment with reducing suppression; effectively sequester COVID care from
random local testing, central database) to
the latency may need to be longer other care to avoid spreading infection
identify community spread early enough to
• This latency could be quite long in the • Capacity will take longer to return to effectively restart suppression if necessary
plateau archetype normal in the plateau archetype-full
• Scaled quarantine and contact tracing for
facilities, healthcare worker
infected individual and international
fatigue/illness
travellers
1. Archetype charts are derived from real data as reported by Johns Hopkins University spanning 01/22/2020-04/01/2020. Bars represent
new confirmed cases by day. Grey arrows symbolize time span from ramp-up of new case load to point of control and are approximate
© Oliver Wyman 17IS THERE ANYTHING THAT MIGHT IMPROVE THIS TIMELINE?
Therapeutics or a virulence-reducing mutation could speed up eradication
Therapeutics1 Mutations2
• Virulence-lowering viral mutations have been
What we • Three general classes of therapeutics which act
differently could be tested / approved: 1) Antiviral observed previously (e.g., SARS) and have
know – slow virus spreading, 2) Symptom relief, 3) contributed to the decline of the epidemic
Immune system enhancement
Current • No existing therapeutics are currently FDA • There is already early evidence of mutation of
approved to treat COVD-19 specifically, though the COVID-19
Status
FDA has authorized emergency use of anti- • There is initial evidence from China of a more
malarials for treatment of COVID-19 despite aggressive (L) and a less aggressive strain (S) of
insufficient evaluation in carefully controlled COVID-19
studies
• Very limited data is available on the impact
• Additional studies and trials are underway to test of identified mutations of the virus on prevalence,
efficacy of existing drugs for COVID-19 transmission, or severity of disease
• Front-line physicians are using some therapies
off-label, which are approved for other indications
• Several clinical trials are underway with the CDC:
– Remdesivir (antiviral) – Gilead – originally for
Ebola, but low efficacy -- highly limited supply
– Hydroxychloroquine (antiviral) – generic –used
to treat Malaria -- limited supply
• Even if off-label efficacy was confirmed, significant • Timing is completely out of our control
Key hurdles manufacturing and distribution capacity would be
needed to ramp up production of existing
therapeutics; current global stores insufficient
Sources: 1. Credit Suisse Equity Research. 2. National Science Review (link)
© Oliver Wyman 1802 IMPACT ON THE LIFE INSURANCE INDUSTRY Panelists: Scott Campion and Kristin Ricci
INSURERS ARE DEALING WITH DUAL CHALLENGES – COVID-19 ITSELF, AND MORE
IMPORTANTLY, THE IMPACTS OF ADVERSE FINANCIAL MARKETS
COVID-19 challenges Market-driven challenges
Low rates + volatility challenging
New business disruption product economics
(shutdowns and social distance)
Solvency, liquidity, and cashflow
testing concerns
Increased mortality and
morbidity
Asset/liability management
with unprecedented low rates
Workforce dislocation
Uncertain credit performance
Oliver Wyman, LIMRA/LOMA, and ACLI are working with a task force of life insurance executives to
help the industry respond to these challenges
© Oliver Wyman 20COVID-19 DISRUPTIONS TO DISTRIBUTION ARE LIKELY SEVERE IN THE SHORT TERM,
BUT MAY LEAD TO LONG-TERM STRUCTURAL SHIFTS
Near-term situation Long-term implications
Tools for remote
customer engagement Distributors are racing to learn A portion of distributors and customers will
how to interact with customers prefer the new ways of working, particularly
Training for existing without face-to-face contact if social distancing is normalized
online tools
Digitization of the
Physical delivery is impractical
fulfillment process
Given efficiency advantages, old systems
Adaptation of and processes will not come back
Outdated paper and wet signature
compliance/KYC
requirements need to be replaced
requirements
Acceleration of Necessity today as in-person medical If adverse selection is controlled, will quickly
non-medical underwriting exams are impossible take over the market
Necessity today as in-person meetings Those who find good solutions will be more
Remote wholesaling
are impossible efficient and effective
© Oliver Wyman 21ADVERSE FINANCIAL MARKET WILL IMPACT INSURERS THOUGH MULTIPLE CHANNELS
Stress in the financial market … … is impacting profitability drivers… … and Insurer economics
Income
Higher hedging costs
Challenged new business
Equity volatility
profitability
Losses on embedded
guaranteed
Reserve strengthening
Reduced (re)
Low interest rates
investment yields
Investment
portfolio losses
Risk of credit defaults
Credit market stress Higher required capital
Downgrades
Solvency
© Oliver Wyman 22WITH SIGNIFICANT UNCERTAINTY, IT IS CRITICAL FOR INSURERS TO EVALUATE &
PREPARE FOR MULTIPLE SCENARIOS
High degree of uncertainty Top concerns Implications
Near-term • Defaults • Need for stress testing/scenario analysis
• New sales – COVID-19 timeline
• How long will social distancing • Low rates – Market implications
measures persist? – Financial impacts
• How severe is economic impact? – Potential responses
• Managing new sales profitability
Mid- to long-term • Low rates • Pressure on profitability and capital
– New sales
• How (and will) markets recover? – In-force blocks
• Less rate-dependent value propositions
• Deteriorating investor story
© Oliver Wyman 2303 CARES ACT, FED PROGRAMS AND MACRO ROLL-UP Panelist: Til Schuermann
USNS Comfort
arrives in NYC
March 30th, 2020
© Oliver Wyman 25FISCAL & CENTRAL BANK RESPONSE DESIGNED TO BRIDGE OVER THE WORST
How long should the bridge be, and what’s on the other side?
01 • Worker protection and support like improved/extended
unemployment
Fiscal response
• Credit support for business, especially SMEs, through
on both sides of the
direct grants, subsidized credit
Atlantic has been massive,
on the order of 6–10+% • Targeted support to specific industries (e.g. airlines)
of GDP
• Central banks have taken many programs from the
02 financial crisis off the shelf
• Significant intervention to support liquidity
Central bank actions
and credit formation
are exceeding those
from the financial crisis • ….. in the face of interest rates that are already near
or below zero
03
• In financial crisis they were the problem, now they
need to be part of the solution
Banks • While in better shape than 2007, some systems
remain central to effective are fitter than others….
transmission of monetary
and fiscal policy
© Oliver Wyman 26US CONGRESS PASSED THE LARGEST EVER PEACETIME STIMULUS PACKAGE –
THE $2.2 TRILLION CARES ACT
Key elements of the Coronavirus Aid, Relief, and Economic Security (CARES) Act
Government Entities Hospitals Distressed Businesses
> $150 BN $130 BN $500 BN
For Fed programs
Includes: Includes: Includes:
• $45 BN in disaster relief for state • $65 BN directly to hospitals • $454 BN for loans and other investments
and local governments • $35 BN to doctors, nurses, and supplies by the Fed and Treasury to provide
• $30 BN in emergency education funding liquidity to the financial system
• The remainder towards Medicare
• $35 BN in emergency transit funding reimbursements and medical research • $29 BN for direct financial aid to struggling
airlines and air cargo carriers
Small Businesses Financial Institutions Individuals
$377 BN > $450 BN
Includes: Includes: Includes:
• $349 BN in small business loans through • Delay to implementation of FASB’s • Direct payments of $1,200
the Paycheck Protection Program (PPP) Current Expected Credit Losses (CECL) to most Americans1
• $10 BN for Small Business Administration • Loan modifications related to COVID-19 • $250 BN in unemployment benefits
(SBA) emergency grants do not have to be categorized as Troubled • Payment deferrals for federally backed
Debt Restructurings (TDRs) mortgages and student loans
1. Individuals who earn $75,000 in adjusted gross income or less would get direct payments of $1,200 each, with married couples earning up to $150,000 receiving $2,400 and an additional $500 per each child.
The payment would scale down by income, phasing out entirely at $99,000 for singles and $198,000 for couples without children
© Oliver Wyman 27THE FEDERAL RESERVE ACTIONS EXCEED FINANCIAL CRISIS
Policy Actions Observations
• Lowered interest rates by 1.5% to 0 - 0.25% in • Quickly deployed monetary policy firepower
two steps within less than two weeks • Signal that Fed plans to flexibly use its balance
01
• Direct purchases of government and GSE sheet (already at $5.2TN) for market functioning
securities at scale and support
• Dollar swap facility with other central banks • Support for global demand for dollars
• Re-establish financial crisis era liquidity and • Took facilities developed during financial crisis off
credit support facilities, e.g. the shelf – and expanded from there
02
– CPFF for commercial paper
– MMLF for money market funds
– TALF for asset back securitization
• Establish new facilities for credit support • Introduction of new facilities point to much wider
– P (S) MCCF for primary issuance and secondary support for credit in the economy
03
market corporate bonds • $454BN capital from CARES Act expected to be
– Main Street Business Lending Program for small levered up to support $3-4TN in credit (lending)
businesses • Banks are much stronger coming into this crisis
• Tolerance for borrower forbearance by banks making them part of the solution (not problem)
© Oliver Wyman 28Last updated: 4/6/2020
LATEST GDP FORECASTS INDICATE A SEVERE SHOCK IN THE U.S. ECONOMY
The escalation of the Covid-19 crisis has lead to significant downward revisions in GDP forecasts globally
U.S. Real GDP Growth Forecasts – Q1, Q2, and annual Key observations from estimates
Annualized growth rate, by select economic analysts (9)1,2
2020 • Forecasts have been
Q1 2020 Q2 2020 (annual)
0 continuously evolving during the
Moody’s
last month – Consensus is that
-5 Bridgewater
Goldman bad news on the virus continues
-10 Goldman
Annualized growth rate
JP Morgan to outweigh good news on policy
Mid-march
-15
consensus actions
-20 • Forecasted Q2 qoq annualized
-25 TD growth rate in the US (~25–40%
-30
Citi
Bridgewater Latest drop) will be the worst since we
Goldman consensus have quarterly data available
-35
Morgan Stanley • Key indicators to track include:
-40
– Trend for percent of U.S.
March 21-30 March 31 – Apr 6
population infected
Q2 2020 Q3 2020 2020 (annual) (scenarios ranging up to 80%)3
Median -5.1% -28.9% -6.0% – Reliance on “smart”
mitigation strategies (e.g.,
Average -5.7% -29.4% -5.3%
mass testing, use of analytics)
Max/Min -2.2/-10.0% -25.0/-37.9% -2.0/-6.2%
– Recovery speed in China
Sources: Bank of America (Apr 2), Moody’s (Mar 25), UBS (Apr 2), Goldman Sachs (Mar 31), Bridgewater (Mar 19), Morgan Stanley (Apr 3). TD Securities (Mar 23), UBS (Apr 2), Citi (Apr 3).
Quarterly estimates in terms of qoq% seasonally adjusted annual rate (saar)
Imperial College COVID-19 response team
© Oliver Wyman 29Last updated: 4/6/2020
Q2 2020 COULD BECOME THE WORST QUARTER IN RECORDED HISTORY
Analysts expect a ~25-40% decline in annualized U.S. GDP in Q2; never observed before in the U.S.
Most severe quarterly declines in real GDP compared to Q2 2020
% Qoq saar (US)1
Worst 10 historical quarters (1947–2019 series)
-5.4 -5.0 -4.8 -4.4 -4.3
-6.1 -5.9
-8.4 -8.0
Analyst -10.0
consensus -28.9
(median)2
Most
adverse
forecast3
-37.9
Q2 Q1 Q4 Q2 Q1 Q4 Q1 Q4 Q1 Q1 Q4
2020 1958 2008 1980 1982 1953 1949 1960 1975 2009 1981
1. Saar: Seasonally adjusted annual rate
2. Sources: Bank of America (Apr 2), Moody’s (Mar 25), UBS (Apr 2), Goldman Sachs (Mar 31), Bridgewater (Mar 19), Morgan Stanley (Apr 3). TD Securities (Mar 23), UBS (Apr 2), Citi (Apr 3).
3. From Citibank (Apr-3), Morgan Stanley (Apr-3)
Other sources: BEA, (historical data), Oliver Wyman analysis
© Oliver Wyman 30Last updated: 4/6/2020
UNEMPLOYMENT TO GO TO ~15% AFTER LARGEST JOBLESS CLAIM IN HISTORY
Back in January, unemployment was 3.6% in January, the lowest since 1969
Initial Jobless Claims – 1971 to 2020
Thousands of claims (US)
9,000
8,000
7,000 Current:
Initial jobless claims (000s)
6,700
6,000
5,000
4,000
3,000
2,000
1,000
0
Jan-70
Jan-72
Jan-74
Jan-76
Jan-78
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Jan-18
Jan-20
Jan-22
Recession
Source: US Department of Labor
© Oliver Wyman 31Last updated: 4/6/2020
PROJECTIONS FOR THE U.S. ASSUME A RETURN TO PRE-COVID LEVELS BY LATE-2021
We continue observing downward adjustments: as of last week, the expectation was to recover by Q2 2021
U.S. Real GDP relative to Q4 2019 (100)
Estimates as of Apr 31
Q4 2019 = 100
100
99
98
97
96 96
95 95
94 95
93
92
91
90 91
89
88
88
87
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2019 2020 2020 2020 2020 2021 2021 2021
Goldman Sachs Morgan Stanley JP Morgan
1. Goldman Sachs (Mar 31), JP Morgan (Apr 3), and Morgan Stanley (Apr 3) forecasts
© Oliver Wyman 32Date: 03/20/2020
IMPACTS ARE UNEVEN ACROSS INDUSTRIES
Highest impacts on industry-level GDP are generally expected in industries that require (or are strongly linked)
to in-person consumption
Bubble size represents contribution to U.S. GDP
Large Negative Shock Moderate Negative Shock Modest Negative Shock Positive shock
Up to -90% Up to -50% Up to -20% Up to +20%
Finance,
4 Retail trade 11 Manufacturing 21 Insurance, 12 Government
RE, Rental
Professional
3 Transportation 6 Wholesale Trade 13 7 Health Care
services
1 Entertainment 4 Construction 5 Information 2 Utilities
General
Food/Drinking
1 Accomodation 2 2 Other services 1 Merchanside
places
Stores
2 Mining 1 Agriculture 1 Food &
Beverage Stores
1 Education
Sources: BofA Global Research, Goldman Sachs Economics Research, Oliver Wyman analysis
© Oliver Wyman 33Last updated: 4/6/2020
LATEST GDP ESTIMATES IN SELECT REGIONS
The escalation of COVID-19 crisis has lead to significant downward revisions in GDP forecasts globally
Consensus 2020 Real GDP Growth Forecasts, Nov 2019 1 vs Apr 20202
% growth YoY, median
Global US U.K. Euro China
8%
5.7%
6%
4% 2.9%
2.0%
2% 1.0% 1.0% 1.3%
0%
-2% -1.3%
-4% -2.8%
-3.7%
-6%
-6.0%
-8%
2020 est. (in Nov 2019) 2020 est. (from Apr-6, 2020)
1 Source: OECD.
2. Sources: Morgan Stanley (Apr 3), Bank of America (Apr 2), Oxford Economics (Mar 24), Bridgewater (Mar 19), UBS (Apr 2), Goldman Sachs (Mar 31), JP Morgan (Apr 3). GDP growth forecasts obtained as the
median of estimates.
© Oliver Wyman 3404 RESILIENCE OF WHOLESALE BANKS Panelist: Dylan Walsh
OUTLOOK FOR WHOLESALE BANKING Key takeaways from our annual report 1. Volatility in the financial markets will provide a welcome boost to industry revenues and earnings, but the effects will be short-lived and structural headwinds facing the business will soon return 2. Credit losses will be a major factor in the severity of the crisis, with the potential for $350BN+ in losses across the corporate and investor client base 3. Earnings are at significant risk - an industrywide revenue shock of 15-20% in 2020 would wipe of the equivalent of 10 quarters of earnings across the sector without significant action 4. Flexibility to defend earnings is limited in the near term - while capital positions are robust, the industry is structurally less profitable and the cost base is less flexible entering this crisis than the last 5. Change is long overdue - this crisis may be the catalyst for deep, structural change that will allow wholesale banks to address some of the fundamental challenges facing their business The scenarios underpinning our outlook and the actions we believe CIB businesses must take to respond are detailed in our Outlook for Wholesale Banking report © Oliver Wyman 36
INDUSTRY REVENUES MAY DECLINE 15-20%
CIB Revenue Forecasts
Revenues before provisions and writedowns, $BN
Deep Recession Recession Rapid Rebound
456 458 454 465 460
448 439 448
424 412
Lending 70 70 71 71 72
68 71 71
375 379 69
71
GTB 91 95 67 65 88 92 94
95 84 87
83
86
Sec. Services 47 50 81 80 45 46 48 50
49 43
44
43
IBD 82 42 41 71 79 72 77 80
81 78 74 57
54 59
Equities 59 56 55 63 58
63 56 49 58 58
40 46
Credit 36 17 39 37 28 43 34
30 33 15 19 38
Macro 71 68 68 76 69 66 80 75 74 85 75 73
2017 2018 2019 2020 2021 2022 2020 2021 2022 2020 2021 2022
Delta YoY -16% 1% +12% -8% +6% +2% +2% +2% -1%
Trough (YoY) Q4 2020 -25% Q3 2020 -13% Q2 2020 -12%
1. Lending represents net lending revenues generated by global CIB divisions from vanilla lending and structured finance activities ; market size of 135BN when incorporating revenue from local players
Source: Oliver Wyman analysis, Coalition proprietary data
© Oliver Wyman 37BANKS HAVE LIMITED OPTIONS TO REDUCE COSTS QUICKLY
The Variable Cost Illusion • 75-80% of costs are fixed today. The fixed
Composition of CIB Cost Base, 2019 cost base has risen over time as banks have
(a) optimized variable spend and (b) added
Other FO Comp costs to support critical infrastructure, risk
management, and controls.
65 5-10
Finance
• Immediately flexible spend (5-10%) is
Risk limited to incentive comp, discretionary
spend (tech & travel), professional fees,
and limited headcount reductions – this
Ops compares to 20-25% entering the GFC.
• More (25-30%) can be achieved with time
Tech FO Non-Comp to invest in automation, infrastructure
rationalization, workforce modernization,
but none of these efforts can be achieved
in less than 12 months.
Composition of Spend Flexible Spend
65% of industry spend is We find that only 5-10% of
composed of front office and spend can be exited within 12
other spend today - all months vs. 20-25% in the 2007-
superficially variable costs 2009 financial crisis
© Oliver Wyman 38THIS COULD LEAVE THE INDUSTRY WITH NEGATIVE RETURNS IN 2020
Wholesale Banking industry RoE
2015 – 2022(e)
Through-the-cycle RoE
Forecast RoE over three scenarios1 for each scenario2
Deep recession Recession Rapid rebound
10-11%
10-11% 10-11%
10% 10% 10% 9-10%
9% 9%
8-9% 8-9% 8-9%
7-8%
4-5%
1-2%
negativeHOW DOES THIS COMPARE TO PRIOR CRISES?
Characterisation of past recessions
Length Depth Severity CIB Returns on Equity
Time (in quarters) until earnings Total industry earnings in the worst Earnings lost (in no. of pre- Returns on equity delivered by CIB
returned to pre-recession levels quarter as % of pre-recession recession quarter earnings) divisions over the 12m after the
earnings during recession downturn hits
Rapid rebound 2-3Q -50% 0.5-1Q 8-9%
Recession 6Q -150% 5-6QA CATALYST FOR CHANGE?
Lever Context Actions
Business Model Shifts Despite the near-term focus on the We see 3 attractive opportunities for business model shifts that can
pandemic response, wholesale banks drive growth and improve economics for CIB:
face structural headwinds in their core
• Optimization of the corporate banking service model
business. Without action, revenue and
economics will continue to erode. • Redefinition of the institutional sales & trading service model
• Proactive support for the transition to a cleaner economy
Operating Leverage CIB businesses have limited room for We estimate that only 5-10% of the industrywide cost base is truly
maneuver in a stress scenario, with variable today (vs. >20% in the GFC). This calls for sustained
structurally lower profitability and investment in operating leverage in two areas:
higher fixed costs today than in 2008. • Focused optimization (5-10% of costs, 1-year horizon)
• Structural changes (15-20% of costs, 3-5 year horizon)
Structural Change $50BN of equity value has been The evolution of the wholesale banking service provider ecosystem
created by third-party providers to the presents an opportunity for CIB businesses to (a) move costs out of
industry over the last 5 years. core operations and (b) participate in the equity upside as the role
of banks in this ecosystem is redefined.
Consolidation Over the past 10 years, a “resilience Consolidation may be the only path to build resilience for some CIB
gap” has emerged between the global businesses, with Europe at the center of the storm.
powerhouses and legacy full-service
banks - scale is the key factor.
© Oliver Wyman 4105 CARES IMPACT ON SMALL BUSINESS LENDING Panelist: Vivian Merker
PAYCHECK PROTECTION PROGRAM
The CARES Act provided $349 BN in funding to small businesses in the form of SBA-Guaranteed forgivable loans
for payroll and certain other expenses
Paycheck Protection Program key dates and timelines
Major
CARES changes Fed announces facility
Act to PPP Program to provide term financing End of covered period End of
Passes details goes live backed by PPP loans to extend loans loan term
3/27 3/31 4/2 4/3 4/6 6/30 2 years from
origination
Origination
Loan payments are deferred for 6 months
8 weeks post-origination
Major changes
to PPP details
Go-live parameters Forgiveness can be requested on payroll
and certain other expenses1
• Loans up to $10 MM
incurred during 8 week period from
• 1% interest rate loan origination
• Lender compensation from SBA of 1–5%
• 100% guaranteed by SBA
• No collateral or personal guarantees
• Mainly focused on businesses with
fewer than 500 employees
1. Includes: Payroll, mortgage interest, rent, and utilities; 75% must be used for payroll
© Oliver Wyman 43PAYCHECK PROTECTION PROGRAM
New challenges are mounting as the program gets underway
Lenders are rapidly resolving the go-live challenges Now attention is shifting to new priorities
Deciding whether to participate and who to serve Providing businesses with equitable access to funding
Communicating with potential applicants Preventing fraud and compliance issues
Planning and delivering a smooth loan
Setting up a process to accept and review applications
forgiveness process
Establishing a strategy to help businesses to get back
Transmitting applications to the SBA
on their feet
© Oliver Wyman 44READ OUR LATEST INSIGHTS ABOUT COVID-19 AND ITS GLOBAL IMPACT ONLINE
Oliver Wyman and our parent company
Marsh & McLennan (MMC) have been monitoring
the latest events and are putting forth our perspectives
to support our clients and the industries they serve
around the world. Our dedicated COVID-19 digital
destination will be updated daily as the situation evolves
Visit our dedicated COVID-19 website:
https://www.oliverwyman.com/coronavirus
© Oliver Wyman 45QUALIFICATIONS, ASSUMPTIONS AND LIMITING CONDITIONS This report is for the exclusive use of the Oliver Wyman client named herein. This report is not intended for general circulation or publication, nor is it to be reproduced, quoted or distributed for any purpose without the prior written permission of Oliver Wyman. There are no third party beneficiaries with respect to this report, and Oliver Wyman does not accept any liability to any third party. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. Oliver Wyman accepts no responsibility for actual results or future events. The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof. All decisions in connection with the implementation or use of advice or recommendations contained in this report are the sole responsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties. In addition, this report does not represent legal, medical, accounting, safety or other specialized advice. For any such advice, Oliver Wyman recommends seeking and obtaining advice from a qualified professional.
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