European banks could take a $947bn hit in post-pandemic worst-case scenario, consultancy Oliver Wyman says

  • European banks face credit losses of up to 800 billion euros ($947 billion) over the next three years in a worst-case scenario, according to a Olivier Wyman report.
  • In case the region isn’t hit for a second COVID-19[feminine] vague, a sharp increase in unsecured loan losses could still cost banks in Europe around 400 billion euros ($473 billion), according to the report.
  • “The pandemic is unlikely to cripple the European banking sector, but many banks will be pushed into a ‘state of uncertainty’, with very low yields,” said co-head of EMEA financial services at Oliver Wyman .
  • Visit Business Insider’s homepage for more stories.

The effects of COVID-19 have not yet fully passed through the European banking landscape.

The impact of the pandemic is here to stay and will have profound repercussions for European banks, according to a recent report by consultancy Oliver Wyman.

Banks in Europe can expect to face credit losses – bad debts that are unlikely to be recovered – of up to 800 billion euros ($947 billion) in an adverse scenario, according to the report.

Despite the huge figure, the report says these credit losses are “manageable” as the amount would be less than 40% of those suffered as a result of the 2012-2014 global financial crisis and eurozone crisis.

In a base case scenario, banks can expect loan losses of around 400 billion euros ($473 billion), about 2.5 times the level seen in the previous three years – a period relatively lower losses.

If banks were to face the worst, the rate of non-performing loans would rise to 10%, which would represent a drag on bank profitability.

“The pandemic is unlikely to cripple the European banking sector, but many banks will be pushed into a ‘state of uncertainty’, with very low yields,” said Christian Edelmann, co-head of financial services EMEA at Oliver Wyman.

Read more: RBC lays out 6 deals to make now before a possible Democratic sweep in the election – and explains why waiting until November is a bad decision

COVID-19 has affected the retail and services businesses of many European banks, as their second quarter results show this week.

Barclays’ net profit fell 66% and the Swiss bank set aside $4.7 billion in provision for coronavirus-related losses, Deutsche Bank’s net profit fell below analysts’ expectations and the Credit Switzerland has overhauled much of its business structure with effect from August 1.

“Banks will need to step up their cost-cutting efforts and manage credit losses carefully, but the industry is currently unlikely to need radical restructuring like during the global financial crisis,” said David Gillespie, head of consultancy in the UK and Ireland.

However, the report suggests that circumstances could be worse as the banking sector has been aided by government support programs.

So far, investment banks stand to gain from helping companies raise billions in debt during the pandemic.

The report suggests that the rise of neobanks, which use a digital-first approach, is helping to streamline processes and significantly reduce the costs incurred by incumbent banks.

“Lines of business will need to work much more closely with technology teams and execute major product and process simplification,” the report said.

“Without it, automating back-office tasks and tearing down systems that really unlock value won’t be possible.”

Read more: The creator of the first pure-play space ETF told us 3 reasons why now is the perfect time to invest in the arena – including his bet on companies that are already making money from it