We Can Work It Out: Preparing for a Wave of Workout Activity

Anyone with experience in banking knows that lending is a cyclical business meaning that problems also come in waves. In other words, problem loans tend to cluster through time. And the reason that credit problems tend to cluster through time is because the problems tend to have a common cause: most often linked back to trouble with the broader economy.

But is there actually going to be a wave of workout cases off the back of the COVID-19 crisis? We understand that there are two sides to this debate. The negative impact on gross domestic product (GDP) for some countries, and particularly for certain sectors, has been unprecedented. But on the other side of the debate, the monetary and fiscal stimulus from policymakers has also been unprecedented. Optimists point to the fact that the government support might be held in place until the economy recovers, mitigating any downside. But it is also likely that some sectors will see demand rebound slowly, leading to a period of stress after support is withdrawn. We should also remind ourselves that credit risk is an asymmetric risk. Even if the economy rebounds from the pandemic stronger than it was before, it is clear thatindividual companies will have suffered to very different degrees. If half the portfolio improves and the other half deteriorates this will still lead to an increase in the number of workout cases.

Unless you are extremely confident that your workout processes are highly automated and will efficiently scale under increased activity then we would recommend that preparations be initiated without too much further debate or delay.