Analysis: Europe is preparing for pandemic reality to hit banks

FRANKFURT (Reuters) – Outstanding debt from pandemic-affected borrowers has ravaged the profits of major European banks and sparked a debate among politicians over whether they might ultimately need state aid .

FILE PHOTO: European Economic Commissioner Paolo Gentiloni attends a press conference in Brussels, Belgium, November 18, 2020. REUTERS / Johanna Geron / Pool / File Photo

Reflecting on the impact of the pandemic, many bank executives say the worst is behind them, with Societe Generale CEO Frédéric Oudea and BNP Paribas CEO Jean-Laurent Bonnafe predicting an imminent rebound.

“Optimism is (…) a weapon of war”, declared in January Philippe Brassac, general manager of Credit Agricole, denouncing the “slanderers”. “And this war, we can win it.”

The three French lenders saw their profits contract last year and the profits of Spanish bank Santander and Dutch bank ING also fell.

As leaders express their confidence, EU officials worry that the banking problems have barely started.

They fear more borrowers will default when government support, including billions of euros in loan guarantees in France, Spain and elsewhere, is canceled.

Officials expressed their concerns in a report presented to eurozone finance ministers who met on Monday, warning of “large-scale business distress”.

In the document, they underscored how much banks rely on governments to help borrowers.

Without government support, they estimated that around a quarter of EU businesses could have been in trouble at the end of last year and warned that banks’ provisions for such losses did not reflect ” underlying deterioration ”.

About 587 billion euros ($ 712 billion) in loans were under moratorium and 289 billion euros in credit had been granted through government guarantees, they said, from a tally at the end of the l ‘last year.

“We must avoid a sharp increase in bankruptcies,” Paolo Gentiloni, European Union commissioner for the economy, told journalists after the ministers’ meeting.

The same unease is felt at the European Central Bank, which supervises lenders.

In January, he said banks set aside less for bad loans than their rivals in the United States and that it suspected some were not taking sufficient action, skewing the risk calculation to offer a more promising outlook for the future.

Both continents have freed billions to stem the economic fallout from the pandemic, although in Europe, a mosaic of independent states, the type of aid, whether it is a grant or a guarantee, depends on the country granting it.

France, Italy and Spain have issued billions in loan guarantees, while Germany has given generous grants.

Jérôme Legras of Axiom Alternative Investments said the optimistic message from the bankers was at odds with that from the regulators: “The supervisor’s message is almost exactly the opposite.

The rosy picture drawn by some executives is also at odds with data collected by the European Datawarehouse, which analyzed half a trillion euros in European mortgages.

Its survey last December calculated that a fifth of loans in the UK had required a stop in payment, closely followed by Portugal as well as Italy, with more than 12%, and Ireland with around 10%. .

A eurozone official, speaking on condition of anonymity, said that while banks were largely robust, “some (…) may run into problems or need to be liquidated.”

Despite the concerns of European officials, deep divisions remain over how to react.

Although the bloc of 19 eurozone countries agreed to give the central bank the responsibility of overseeing lenders after the financial crash more than a decade ago, they remain at odds over what to do if lenders are having problems.

Rich countries, like Germany, are reluctant to help the poorest, like Italy or Greece, by setting up a common safety net.

Klaus Regling, head of the European Stability Mechanism, told reporters on Monday that the ESM fund, set up during the great financial crash to help struggling countries, could be used to liquidate banks from next year.

“We have created a strong second line of defense,” he said, highlighting the impact of rising insolvencies on banks and governments.

Deciding on a common action such as recourse to the ESM is, however, highly political. Efforts by the European Central Bank, for example, to set up a pan-eurozone bad bank to help lenders store and sell distressed loans have made little progress.

In the meantime, many bankers are hoping for the best.

“There will be light at the end of the tunnel,” said Steven van Rijswijk, CEO of ING. “Where the tunnel ends, we don’t know. “

($ 1 = 0.8226 euros)

Additional reporting by Muvija M in Bangalore, Jan Strupczewski in Brussels, Jesus Aguado in Madrid, Matthieu Protard in Paris, Toby Sterling in Amsterdam and Francesco Canepa in Frankfurt; edited by Barbara Lewis

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