European banks are bracing for a tsunami of bad debt later this year, with £30bn ($39.4bn) so far set aside to cover loan defaults.
Over half of Europe’s 30 biggest banks have now reported half-year results. Between them, banks have set aside £30bn to cover future losses, according to analysis by Yahoo Finance UK.
By comparison, the same cohort of 17 banks had set aside around £5.5bn to cover credit losses by this time last year.
Loss buffers will continue to rise in the weeks to come, with five of Europe’s ten biggest banks yet to report numbers. This includes the continent’s biggest bank, HSBC (HSBA.L), which will report on first half performance on Monday (3 August).
Credit rating agency Fitch said this week that eurozone banks would likely end up having to set aside almost €200bn over the next three years to cover potential losses. The European Central Bank (ECB) this week extended a ban on dividends and share buybacks into 2021 to encourage banks to build up more capital buffers.
Lenders are bracing for surging levels of bad debt as a result of the COVID-19 pandemic, which has forced the shutdown of many major economies and sent global growth rates into reverse.
So far, default rates across Europe have largely remained stable thanks to unprecedented levels of state support. In the UK, corporate insolvency rates have in fact fallen during the crisis.
However, economists expect that to change. The ECB predicts that unemployment across the eurozone will peak at 10% later this year as support schemes begin to unwind. Data this week showed unemployment ticked up from 7.1% to 7.8% in June.
In the UK, the Office for Budget Responsibility predicts unemployment will reach almost 12% by the end of the year.
Faced with this uncertainty and gathering economic storm clouds, banks have built huge buffers to absorb future losses.
Santander (SAN.MC) has set aside the most of any European or UK lender so far, with €7bn (£6.3bn, $8.3bn) of loss provisions. The smallest provision has been taken by Sweden’s Handelsbanken (SHB-A.ST), which set aside just SEK635m (£55m).
UK banks account for around a third of the loss buffers across Europe. Chief executives this week said the outlook for Britain’s economy had worsened in recent months.
“We expect [loan loss] visibility to be lacking until furlough and forbearance unwinds towards the end of the year 2020,” UBS’s banking analyst Jason Napier wrote in relations to UK banks. He said 2020 was likely to be a “lost year” for lenders.
The mounting provisions and fears about the economy sparked a sell-off in banking and financial shares on Thursday, with the European banking benchmark falling 3%.
Fitch said banks with “significant exposure” to small businesses and consumer finance will be the most at risk of losses as the economy turns.
Listen to the latest podcast from Yahoo Finance UK