I’m new to investing and have never invested during a recession.
Do banks usually remain profitable during recessions or sink into negative earnings?
Would anyone know how to calculate the impact of various scenarios into LLOY earnings projections? E.g a gdp growth rate of -2% for a couple of years
Thanks in advance
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A GDP recession of 2% or more is highly unlikely in the medium term. You would have to go back to the Great depression of 1919 and 1930 for when that last occurred. Even the financial crisis of 2008 only had a negative GDP growth of over 2% for one quarter only.
Banks do not always make a profit and not all banks are equal as they serve different markets e.g. Lloyds are largely UK centric with mortgages as a large percentage of their business. Banks are also highly regulated (although some would say not lol!) and it is in the government's/BoE interest to bail out banks as the financial crisis demonstrated.
Introduced around the world in the wake of the financial crisis, stress tests are a way of checking that banks can withstand doomsday scenarios without recourse to taxpayer bailouts. They are intended to model for unlikely but severe shocks. The intent is that the banking system can continue to function under extremely poor conditions. That does not mean they will continue to make a profit though.
So, in summary. Banks can and do make losses either through specific unique events, or the markets they are working in or due to regulation or country/region/world economic performance. But "a gdp growth rate of -2% for a couple of years" would be pretty much a doomsday scenario for many.
