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Social distancing may spur credit losses: Morgan Stanley

[NEW YORK] Efforts to stem the spread of the novel coronavirus will hurt a variety of businesses, creating potential credit challenges for banks, according to Morgan Stanley analysts.

Closing schools, cancelling events, encouraging people to work from home, cautioning people to go out less and not to touch surfaces in public are part of a "broader social distancing trend" that will crimp interactions, analysts led by Ken Zerbe wrote in a note. Banks may incur credit losses depending on whether businesses like malls and hotels have "sufficient cash on hand for shortfalls in cash inflows as well as the duration and severity of the outbreak," he said.

The KBW Bank Index hit session lows in afternoon trading on Wednesday, sinking as much as 7.9 per cent, as concerns about the virus mounted. Top decliners included CIT Group Inc, which tumbled as much as 14 per cent to a record low; Citigroup Inc, down as much as 10 per cent, and People's United Financial Inc, which fell as much as 9.9 per cent.

Mr Zerbe said the banks most at risk are those with exposure to restaurants and hotels, including Cadence BanCorp, Synovus Financial Corp, Bank OZK (through its construction portfolio) and East West Bancorp Inc. He added that 22 banks across Morgan Stanley's large and midcap coverage, including CIT Group and TCF Financial Corp, haven't explicitly disclosed their exposure to restaurants and hotels, "which makes it challenging when comparing individual banks". He urged better disclosure.

Businesses that Mr Zerbe is less concerned about include residential mortgages, some forms of commercial real estate, and some types of commercial and industrial lending.

"We believe that, as long as they remain employed, people are highly likely to continue paying their mortgage, as they spend more time at home," Mr Zerbe wrote. "Consumer staples (including grocery stores and warehouse stores) might also see less impact, especially as people stock up in anticipation of self-quarantines or isolation."

The virus may prove to be the most serious crisis of the century so far, former US Treasury Secretary Larry Summers said on Wednesday, adding that policymakers haven't yet been able to grasp its gravity.