BY Fraser Tennant
Europe’s financial institutions are facing testing conditions as a result of the coronavirus (COVID-19) pandemic, with 46 percent of banks now carrying negative outlooks – a 14 percent rise year-over-year (YOY) – according to a new report by S&P Global Ratings.
In ‘S&P Credit Conditions Europe – Curve Flattens Recovery Unlocks’, S&P also notes that having been forced to set aside higher provisions to account for the pandemic, a quarter of the top 35 European banks reported a loss for the first quarter, with the remainder seeing pre-tax profit decline by a third on average YOY.
Furthermore, states the S&P report, the outlook distribution is uneven by country, with some having most banks with negative outlooks and others having just a few. Additionally, weaker asset quality and revenue pressure will exacerbate many banks’ pre-existing profitability challenges.
“Despite this, the number of rating downgrades has been modest, with most banks benefiting from comfortable capital and liquidity buffers, and unprecedented government support for households helping contain damage,” said Paul Watters, senior director, corporates at S&P Global Ratings. “As such, the economic shock is expected to be shorter-lived than a standard recession, however the ultimate extent of credit losses will depend on the speed and magnitude of the rebound, with a softer, longer upturn expected to weigh heavily on bank ratings.”
Among the key developments highlighted in the report are: (i) banks’ lending to companies in particular picked up strongly in the eurozone and the UK in March and April, confirming that banks are playing their role as providers of the financing that companies need to cope with liquidity shortages; (ii) the low cost of credit demonstrates the at least initial effectiveness of central banks’ intervention; (iii) consumers repaid some unsecured debt during the lockdown, but this trend is likely to start reversing; and (iv) access to the European Central Bank (ECB) funding facility has surged.
That said, banks may be unwilling to make full use of the flexibility on offer to operate temporarily with lower capital levels, according to Mr Watters. “They know that at some point they will have to rebuild these capital buffers,” he explained. “Future provisioning needs are particularly uncertain, and banks may be mindful of investors’ perceptions and ultimately their cost of capital.”
Mr Watters concluded: “The ultimate size of credit losses depends on the speed and magnitude of the rebound, becoming evident only once payment holiday schemes wind down. All in all, bank provisioning will likely peak in the second or third quarter but could persist at an elevated level well beyond this.”
Report: S&P Credit Conditions Europe – Curve Flattens Recovery Unlocks