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Europe’s banks brace for bad debt build up from coronavirus crisis

Europe’s banks are expected to have to set aside billions for potential loan losses as well as take profit hits because of the coronavirus crisis when they start reporting results over the next two weeks. 

The region’s banks were already under pressure before the crisis with high costs, low returns, and demands to fix outdated technology. 

Mergers, which could potentially relieve those issues, have been difficult to pull off because of national barriers. 

The largest US banks, which reported earnings last week, set aside $25 billion for credit losses in the first quarter, raising questions about whether European banks would follow suit.

Italy’s UniCredit became the first major euro zone bank to write down the value of its loans to reflect the economic impact of the coronavirus. 

Italy’s biggest bank by assets said it would book around €900m in additional loan loss provisions in the first quarter. 

Analysts over the past 30 days have revised upward by almost 130% their expectations for loan loss provisions in 2020 by Europe’s most important banks, according to a Reuters analysis of data from Refinitiv. 

At the same time, analysts have cut by more than 40% their full-year profit forecasts for those banks, which include global banks like HSBC, BNP Paribas and Deutsche Bank, the data showed. 

Regulators have said they will be lenient in enforcing accounting rules on expected loan losses, but there is pressure on European banks to be realistic about the looming downturn. 

Lower profitability than their Wall Street rivals will mean European banks have less room for manoeuvre. 

“Those US banks make huge amounts of money,” said Rob Smith, financial services partner at KPMG. 

“European banks don’t have that luxury of revenue and income to absorb such significant increases” in loan loss provisions, he said. “That in turn that will dictate their approach.” 

Though banks are not legally obliged to come up with the bulk of provisions now, “prudence is a recommendation that should be followed” given the current environment, a person with knowledge of the matter said. 

The vulnerability of European banks to the outbreak was highlighted this week by the credit rating agency Fitch, which disclosed that it had taken 116 rating actions on Western European banks, mainly revising their outlook to negative. 

The flood of European bank earnings will provide only a partial snapshot of how they are faring so far during the crisis, which began in earnest as the first quarter was well underway. 

Credit ratings agency S&P said management disclosures and comments would be “more revealing than the results themselves.” 

Italian banks, which have worked hard to tackle the legacy of previous recessions, are expected to start raising provisions against loan losses in the first quarter as the economy heads for a contraction which the International Monetary Fund estimates could reach 9.1% this year, analysts say. 

Italy’s banks have the highest exposure among European lenders to small and medium-sized businesses, which are likely to suffer the most from a prolonged lockdown as the country battles with one of the world’s deadliest coronavirus outbreaks. 

Morgan Stanley estimated the crisis risks saddling Italian banks with up to an additional €60-80 billion in impaired loans over the next two-to-three years, an up to 45% increase on the current stock. 

Spain’s banks will also report an increase in provisions, analysts said. 

Santander said earlier this month in a US regulatory filing the pandemic may cause “us to experience higher credit losses” there. 

Analysts said that a near standstill in Spain’s economy would first have a direct impact on the banks’ mortgage books, which account for around 40% of their credit portfolios, and on their consumer books, which make up for 8% of lending. 

The Bank of Spain said on Monday that the country’s tourism-dependent economy could shrink as much as 12.4% this year if the coronavirus lockdown lasts 12 weeks. 

At French banks, any higher loan loss provisions are expected to be “manageable”, Jon Peace, an analyst at Credit Suisse, said. 

Deutsche Bank is the only major European lender that analysts forecast to post a loss for the full year of 2020 as it goes through a costly restructuring. 

The crisis has made it difficult for the bank to predict whether it will meet its financial targets after years of losses. 

Analysts as of last week had nearly doubled their expectations for Deutsche Bank’s first-quarter and full-year provisions for credit losses compared with early March, according to consensus forecasts published on the bank’s website.

Moody’s has highlighted that Deutsche Bank is among the global Europe-based investment banks that is most vulnerable to loan-loss charges. 

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