European banks brace for bad debt buildup following coronavirus crisis

LONDON / MILAN / MADRID (Reuters) – European banks are expected to set aside billions for potential loan losses as well as taking profits from the coronavirus crisis when they start reporting results in the next two weeks.

FILE PHOTO: The Deutsche Bank logo is pictured on a company’s office in London, Britain July 8, 2019. REUTERS / Simon Dawson

Banks in the region were already under pressure before the crisis with high costs, low returns and demands to repair outdated technology. Mergers, which could potentially alleviate these problems, have been difficult to achieve due to national barriers.

America’s biggest banks, which posted profits last week, set aside $ 25 billion for first-quarter credit losses, raising questions about whether European banks would follow suit.

Wednesday, Italian UniCredit CRDI.MI became the first major bank in the euro area to write down the value of its loans to reflect the economic impact of the novel coronavirus.

Italy’s largest bank by assets said it would record around 900 million euros ($ 976 million) in additional provisions for loan losses in the first quarter.

Over the past 30 days, analysts have revised their expectations for loan loss provisions in 2020 by Europe’s largest banks up nearly 130%, according to a Reuters analysis of Refinitiv data.

At the same time, analysts have cut their full-year profit guidance by more than 40% for these banks, which include global banks like HSBC. HSBA.L, BNP Paribas BNPP.PA and Deutsche Bank DBKGn.DE, the data showed.

Regulators have said they will be lenient in applying accounting rules to expected loan losses, but pressure is being put on European banks to be realistic about the impending slowdown. Lower profitability than their Wall Street rivals will mean European banks will have less room to maneuver.

“These US banks are making huge sums of money,” said Rob Smith, financial services partner at KPMG.

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

Although banks are not legally obligated to come up with the bulk of the provisions now, “caution is a recommendation that must be followed” given the current environment, said a person with knowledge of the matter.

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

EARNING SEASON

The influx of European bank profits will only provide a partial glimpse of how they have developed so far during the crisis, which began in earnest as the first quarter was well under way. Rating agency S&P said management’s information 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 increasing their allowances against loan losses in the first quarter as the economy heads into a contraction which, according to the estimates of the International Monetary Fund, could reach 9.1% this year, analysts said. .

Italian banks are the most exposed among European lenders to small and medium-sized businesses, which are likely to suffer the most from a prolonged foreclosure as the country grapples with one of the world’s deadliest coronavirus outbreaks.

Morgan Stanley estimated that the crisis could hit Italian banks with as much as € 60-80 billion ($ 86.86 billion) in bad loans over the next two to three years, an increase of up to go up to 45% compared to the current stock.

Spanish banks will also report an increase in provisions, said Nuria Alvarez, analyst at Madrid brokerage firm Renta 4.

Santander SAN.MC said earlier this month in a US regulatory filing that the pandemic could “cause us to suffer higher credit losses” there.

Analysts said that a virtual shutdown of the Spanish economy would first have a direct impact on banks’ mortgage portfolios, which account for around 40% of their credit portfolios, and on their consumer portfolios, which account for 8 % loans.

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

In French banks, any higher loan loss allowance should be “manageable,” said Jon Peace, an analyst at Credit Suisse.

Deutsche Bank is the only major European lender that analysts predict will 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 goals after years of losses.

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

Moody’s pointed out that Deutsche Bank is among the global investment banks based in Europe that are most vulnerable to loan loss charges.

Swiss credit CSGN.S kicks off the results season on Thursday.

Reporting by Huw Jones in London, Valentina Za in Milan, Jesus Aguado in Madrid, Maya Nikolaeva in Paris and Tom Sims in Frankfurt; written by Tom Sims; edited by Jane Merriman and Jason Neely