Review of Credit Exposure in Selected Industries in View of the Coronavirus
- The Banking Supervision Department recently completed a review in which it examined the state of business borrowers, in industries that were impaired by the coronavirus crisis. The review was conducted from the perspective of banking supervision, examining the implications of the crisis for the banks’ credit risk (as distinct from testing the macroeconomic effects of the crisis), and focused mainly on large borrowers in industries that were adversely affected by the crisis and those to which the banks have exposures that exceed a certain threshold.
- The review shows that different industries have been differently affected by the crisis:
- Among the industries that were reviewed, the most adversely impacted were aviation, fashion, and natural gas. Activity in each of these decreased significantly during the crisis due to closure of the skies, restrictions on trade, and social-distancing rules that impaired private consumption and global and domestic demand for natural gas.
- In the hotels industry, the crisis dealt a powerful blow to urban hotels and boutique hotels that rely mainly on tourism from abroad, while resort hotels were affected more moderately.
- In income-producing commercial real estate, most of the damage pertained to indoor and large malls; Neighborhood shopping centers were less powerfully affected because they are in the open air, close to residential areas, and their composition of tenants tilt more to essential activities such as food and pharmaceuticals.
- In the renting and leasing of motor vehicles industry, the main casualties were those exposed to tourism from abroad; there was also some detriment to leases that were extended at large discounts due to partial transitioning to working from home.
- The construction and motor-vehicle-import industries sustained less damage because they remained active to varying extents in the course of the year.
- The intensity of the blow also varied among borrowers. As a rule, the crisis had a more negative impact on small and middle-sized companies than on large borrowers. Also more negatively impacted were borrowers who entered the crisis with high leveraging and without adequate liquidity surpluses. The impact of the crisis moderated among borrowers who quickly made adjustments to cope with the risk and mitigate it by increasing efficiency, placing staff on unpaid leave, issuing debt and liquidating assets, restructuring debt and delaying payments, utilizing regulatory dispensations, tailoring business strategy to the times (e.g., by transitioning to on-line sales), and so on.
- Pursuant to the crisis, structural changes that may affect certain industries even after the crisis are likely to occur (for example, less use of “company cars” and workspaces, fewer business flights, and so on, due to the transition to working from home.). Looking toward the future, there is still uncertainty regarding the new routine that will develop. In some industries (e.g., aviation, office space), the implications of the crisis are expected to persist long after the return to normality. In others, the impact will depend mainly on the duration of the crisis and the government’s measures. In industries typified by inelastic demand (e.g., residential construction, natural gas), it is believed that the level of risk is unlikely to rise significantly in the long run.
- The findings of this review show that even though risk in industries affected by the crisis has risen, there is no single borrower or group of borrowers that endangers the stability of the banking system (similar to the case before the crisis). Where warranted, the Banking Supervision Department presented banks with specific demands, such as heightened monitoring of certain borrowers, more stringent loan classification and provisioning in financial statements, and reinforcement of several borrowers’ credit and collateral structure.