Where are European banks on capital, liquidity ahead of second quarter results

European banks are heading for second quarter results after suffering near universal drops in key capital levels, threatening their ability to lend, while most have also seen their liquidity capacity to meet their financial obligations s’ weaken.

S&P Global Market Intelligence research looked at the Tier 1 capital and liquidity coverage ratios of 21 major banks in major European economies, to assess how they coped with the pandemic. CET1 measures the amount of capital that banks hold against risk-weighted credit exposures, while LCR is a measure of the ability of banks to meet their short-term financial obligations.

Regulatory support

European countries have been affected by the pandemic to varying degrees in the first three months of 2020 – with Italy, for example, imposing the first national quarantine on March 9. Since then, all major European countries have imposed some form of lockdown in an attempt to mitigate the worst effects of the coronavirus.

the bank of england and the European Central Bank relaxed regulatory capital requirements to make lending easier – for example, the BoE reduced the counter-cyclical buffer to zero percent. However, such metrics may not always work as expected, Sam Theodore, managing director of Scope Insights, told S&P Global Market Intelligence.

“One problem would be the stigma attached to a bank using its buffers – especially the liquidity buffer – given the possible reaction of the market, at least for the first or the first two banks bold enough to do so,” he said. declared.

The emerging prudential leeway is ‘very positive’ in that it allows banks to lend more and help rebuild economies, but supervisors need to make it clearer that there should be no stigma related to the use of the cushions, and that this would indeed be viewed as a positive, he said. This would be similar to how the ECB delivered a non-stigma message when the first longer-term refinancing operation was made available to euro area banks during the euro sovereign crisis.

Both central banks have made cheap loans available to banks to facilitate lending to corporate clients. The ECB also offers cheap central bank liquidity auctions in which the central bank effectively pays banks to borrow money, via a negative interest rate on deposits, as long as they keep credit lines open. business credit.

Both the ECB and the BoE expect banks to use cash and capital reserves if the provisions on exposure to affected sectors such as tourism, hospitality, airlines, transportation, energy or the automobile is increasing dramatically, “which is a distinct possibility,” Theodore said.

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The banking sector entered the COVID-19 crisis in a relatively strong prudential position in terms of capital and especially liquidity, thanks to a new system put in place after the global financial crisis, Theodore said.

But there are key differences between the two situations, John Wright, credit analyst at S&P Global Ratings, told S&P Global Market Intelligence.

The unprecedented speed and scale of fiscal and monetary policy support in 2020 not only guaranteed bank liquidity, but also led to a rapid recovery in risk appetite in capital markets, he said. -he declares.

“The latter has resulted in a much faster return to normalized market access for bank capital – in months, not years,” the analyst said. “Many European banks have been cautious in not wasting time raising capital in this context – more than $ 9.5 billion of additional level 1 offering has been successfully issued since mid-May. “

He noted, however, that there was considerable uncertainty regarding the outcome of asset quality issues that are expected to arise due to various payment waiver and leave programs that have been implemented.

Since the financial crisis, regulators have subjected banks to stress tests to test their soundness in various adverse scenarios. These do not include the effect of a pandemic, but that is subject to change.

“I fully expect health emergency scenarios to be part of future bank stress tests, probably no later than 2021, when the next European Banking Authority stress test is scheduled, after have been rightly postponed from 2020, ”Theodore said.

Key concerns

Most banks saw their capital decline in the first quarter as they took provisions for loan losses in anticipation of coronavirus-related write-downs. For banks already charged with low levels of capital, these arrangements have had a significant effect.

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Among the banks in the sample, Spanish banks Banco Bilbao Vizcaya Argentaria SA, Banco Santander SA and CaixaBank SA had the lowest ratios of Tier 1 ordinary shares in the first quarter. All three have set aside large sums for estimated pandemic losses after the country was hit hard by the virus.

BBVA said in presenting its first quarter results that it has taken a conservative approach to provisions for loan losses in the first quarter, and that provisions for future quarters will be significantly lower.

The bank’s write-downs amounted to 2.58 billion euros in the first quarter, compared to 966 million euros in the same period of 2019. The bank has decided not to keep its CET1 ratio target of 11%. and 12%.

Provisions for loan losses at CaixaBank in the first quarter amounted to € 515 million, of which € 400 million related to the pandemic. Santander did not forecast the impact of the pandemic on future profits in its first quarter results, but said it would reassess its medium-term goals once the situation stabilizes.

Danish bank Danske Bank A / S, Dutch bank ABN AMRO Bank NV and UK bank Royal Bank of Scotland Group PLC recorded the highest capital ratios in the first quarter.

Danske was hit hard from the start by coronavirus-related loan impairment charges, with loan write-down provisions amounting to Kroner 4.34 billion, up from Kroner 618 million in the first quarter of 2019.

ABN Amro has declared € 1.11 billion in provisions for depreciation as the pandemic and the oil crash put pressure on the bank.

RBS is still state-owned after being bailed out by the government during the financial crisis. He reported a sharp increase in provisions for loan losses in the first quarter, rising almost ten times from the previous figure to £ 802million from £ 86million. Its pre-tax profits halved to £ 519million.

Liquidity

Dutch bank ING Groep NV, BBVA and the German Commerzbank AG had the lowest liquidity coverage ratios in the sample.

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ING recorded 661 million euros of additional provisions for loan losses in the first quarter, more than triple the 207 million euros recorded a year earlier.

Commerzbank CEO Bettina Orlopp warned that “the bulk of the problems” associated with the pandemic will materialize in the second and third quarters. The bank expects losses to total around 1.1 billion euros for the year.

Topping the rankings were CaixaBank, Credit Suisse Group AG, based in Switzerland, and HSBC Holdings PLC, based in the United Kingdom.

Credit Suisse increased its provisions for credit losses in the first quarter to CHF 568 million from CHF 81 million a year ago. The bank has adapted its investment banking arm to focus on wealth management in recent years and still plans to achieve a tangible return on equity of 10% this year.

HSBC reported sharply declining first-quarter profits and set aside $ 3.03 billion to cover bad debts, up from $ 585 million a year earlier. CEO Noel Quinn said he expected the bank’s CET1 ratio to fall below 14% in the second quarter, but said he believed regulators were comfortable with it as long as the bank supported loans in the UK and Hong Kong.