Banks' credit quality remained quite strong through the third quarter. However, industries more exposed to the COVID-19 pandemic, such as the hospitality sector, have caused a headache for many institutions, and performance is unlikely to rebound soon.

Credit deterioration was minimal in the third quarter, and provisions for future losses dropped more than 80% from the prior period. News on Nov. 9 of an effective COVID-19 vaccine seemed to assuage some fears over future credit performance and sparked a huge rally in bank stocks, including names with elevated exposure to the hotel industry. But further clarity likely is needed as the investment community continues to question whether banks have fully reserved for future credit losses.

That question remained front and center coming out of third-quarter earnings season, with investors debating if credit losses have been avoided or simply delayed by the Federal Reserve's actions in the credit markets, unprecedented government stimulus and forbearance offered by banks. Banks provided borrowers relief through loan deferrals, which reached nearly 10% of banks' loan portfolios at the end of the second quarter, but balances have plummeted since then, with the vast majority of credits resuming normal payments.

Many borrowers still seeking relief are in at-risk industries such as retail real estate, restaurants and hotels, where the outlook has been quite negative. Banks have expressed optimism toward performance to date and said during third quarter calls that they are taking a hard line on those credits.

For instance, Gary Lee Guerrieri, chief credit officer at F.N.B. Corp., said his company took aggressive risk rating actions against COVID-impacted portfolios, primarily focusing on hotel and restaurant credits. The company moved about $350 million of the loans into classified status and about $79 million into the special mention bucket, migrating about 90% of its hotel portfolio and close to 25% of its restaurant portfolio to "prudently" build reserves.

Synovus Financial Corp. President and COO Kevin Blair struck a similar chord, noting that deferrals on loans tied to the hotel industry had declined and the majority of the portfolio continues to pay as agreed.

"Despite the results to date, we continue to closely manage and monitor this portfolio as we do not see the normalized return of revenues in the near term," Blair said on the company's third-quarter earnings call.

Synovus Chief Credit Officer Robert Derrick said at an investor conference a few weeks later that borrowers in the company's hotel portfolio recognize that revenues will be lower than prior years. Derrick said that if borrowers book 70% to 80% of revenues achieved in prior years, they should be able to service their debts.

Ultimately, the path of the virus and a medical solution will dictate performance in the lodging business, S&P Global Ratings analysts said during a recent webinar hosted Oct. 29. Emile Courtney, lead analyst of lodging and leisure, said on the webinar that revenue per room, or RevPAR, had fallen 46% through the first nine months of 2020 across the U.S., but declines were even greater in the top 25 markets. Luxury hotels drive much of the activity in larger markets, he said, and those properties are much more reliant on corporate travel and group business, which have dropped considerably amid the pandemic.

"We believe the recovery will continue slowly through the first half of the year because business and group will remain very depressed, at least until there is a widely distributed medical solution to the virus. We are currently assuming that U.S. RevPAR will be down 50% in 2020, recovering in '21 but still remaining 20% to 30% below 2019 levels," Courtney said.

Jing Li, a lodging and leisure analyst at S&P Global Ratings, added that average daily rates, or ADR, recovered over a multiyear period during previous cycles. Meanwhile, he said improved occupancy will be contingent on a medical solution in 2021.

"We're not expecting a RevPAR recovery to 2019 levels until 2023 or perhaps until 2024," Li said.

Pfizer recently delivered hopes of a medical solution, announcing Nov. 9 that its coronavirus vaccine is more than 90% effective in preventing infection. But broad distribution could take some time. 

Gen. Gustave Perna, COO of "Operation Warp Speed," which is overseeing plans to deliver the vaccine to all

Americans for the Trump administration, told NPR on Nov. 9 that if a vaccine is in hand in December, vailability will expand rapidly in the coming months, which could result in most Americans getting access by mid-2021.

However, Perna expressed some concern during an interview with 60 Minutes, which aired Nov. 8, that some people might be hesitant to take the vaccine, even when it is available. 

Natalka Chevance, lead analyst of CMBS at S&P Global Ratings, echoed comments from her colleagues on the recent webinar, noting that the virus will set the timeline for the return of corporate and group demand in the lodging industry. That return will be critical for luxury, trophy hotels in urban markets, she said, because "leisure on its own isn't going to fill that void."