Banks across Europe brace for heavier loan loss loads

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Europe’s biggest banks are set to unveil yet another huge round of loan loss provisions, as they take stock of the damage caused by Covid-19 around the world.

The biggest UK, Swiss and eurozone lenders are expected to fund at least 23 billion euros for the second quarter, according to Citigroup analysts, as they report profits in the coming days. This is in addition to the 25 billion euros in charges that the same group took against possible defaults during the first three months of the year.

Added to the $ 61 billion already set aside by the five largest U.S. banks in the first six months, the combined figure of the largest Western lenders could reach $ 117 billion. This would be the highest net addition to reserves since the first half of 2009, after the collapse of Lehman Brothers, according to Citi.

Few economists are predicting quick “V” recoveries, and more pain is expected when government support plans end in the fall. Oliver Wyman, the consultancy, predicts up to € 800 billion in loan losses for European banks over the next three years in the event of a second wave of infections.

“It’s going to be another tough one – several banks have signaled this could be the worst quarter of the year,” said Jon Peace, analyst at Credit Suisse. He noted that under the new accounting rules banks are required to “take” their provisions for probable losses, but added that at the end of the first quarter they were working on assumptions for GDP growth and jobs “that weren’t as dark as they are today”.

UBS, the first of major European financial institutions to publish a report last week, posted a 43% increase in profits in its investment banking arm, but also took an additional $ 272 million in loan loss charges . That brought its total for the first half of the year to $ 540 million – 16 times the same period in 2019.

“The first quarter was about whether you are resilient and, for some, able to survive,” Sergio Ermotti, managing director of UBS, told the FT. “The second trimester will be whether you can demonstrate your adaptation. We have already entered the “lessons learned” phase of the coronavirus. ”

The already besieged European banking sector, still plagued by problems carried over from the 2008-09 financial crisis, was sanctioned on the stock market. Shares of European banks have fallen 31% so far this year, on average, against a 10% decline in the benchmark Stoxx 600.

On average, banks trade at less than 40 percent of the book value of their net assets. Barclays (€ 22 billion), Deutsche Bank (€ 17 billion) and Italy’s UniCredit (€ 20 billion) have a combined market capitalization of less than Zoom, the $ 74 billion (64 billion) video conferencing company billion euros) which flourished during the pandemic.

“It’s a universal consensus that, given the headwinds, investing in banks is as dumb a business as investing in oil majors,” said Richard Buxton, UK Alpha Strategy Manager at Jupiter Asset Management. “It’s unlikely that anything revealing will emerge from this reporting season to change that.”

“The economic downturn clearly means a sharp increase in bad debts,” he added. However, “I am extremely convinced that whatever damage is done [profit and loss accounts] of the crisis, that does not mean that they have to raise additional capital. “

In the first quarter, there was a big disparity between banks’ accounting approaches to potential loan losses – a divergence called “extraordinary” by Magdalena Stoklosa, head of European financial research at Morgan Stanley.

An outlier so far is Deutsche, which only provisioned € 500m in the first quarter, compared with £ 2.1bn at Barclays and $ 3bn at HSBC. The German bank has already announced that provisions for bad debts will increase to 800 million euros in the second quarter, the highest level in a decade.

For European lenders with large investment banking branches, a surge in commercial income should cushion the blow. U.S. banks reported an average 69% increase in income from trading stocks, bonds and other assets, benefiting from market volatility and a series of emergency fundraisers from large companies.

Most of those gains come from fixed income, whose earnings more than doubled at JPMorgan, Goldman Sachs and Morgan Stanley.

While European banks on the whole have smaller debt trading businesses, Barclays, Deutsche, Credit Suisse and BNP Paribas are the most positioned to make the most of it. On average, analysts expect them to post trading earnings between 40 and 50 percent.

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The loot will not be distributed evenly, according to Berenberg’s Eoin Mullany. While Barclays and UBS have increased their share of global revenue over the past year, “in contrast, the loss of market share of European banks has come almost exclusively from Deutsche and Société Générale,” he said. he declares.

Investors are also awaiting the results of the European Central Bank’s Covid vulnerability exercise on Tuesday, and a related decision on whether banks can resume dividend payments. European, Swiss and British regulators banned payments at the start of the crisis in mid-March to force banks to retain capital and lending capacity.

Stuart Graham, founder of Autonomous Research, said few investors expected the ECB to allow banks to return to normal payments later this year, saying January 2021 “is a more realistic date.”

However, the clarity of the regulator will mean that fund managers “know the rules of the game again,” he added. “This could once again attract investors for whom the sector had been brought to the limit of the investable because of the reduction in dividends.”

Additional reporting by Martin Arnold in Frankfurt

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