With every additional day that companies suffer in the Corona crisis, the risk increases that the banks will also be affected. Private banks, Volksbanks and savings banks have so far got through the crisis relatively lightly. So far, they have suffered more from the zero or negative interest rates imposed by the European Central Bank than from the direct effects of the pandemic.
The real mood behind the scenes at the banks can be seen in one number on their balance sheets: risk provisioning. It indicates how much money the banks are putting aside because they anticipate that loans that they have given to companies and private customers will fail. The higher the risk provision, the narrower the profit and the less money remains to issue new loans.
Deutsche Bank was the first of the big commercial banks to present figures for the third quarter this week, and what it shows there does not help to reassure you: Although loan loss provisions have decreased compared to the second quarter, they are around 273 million euros 56 percent up on the same quarter of the previous year. The new lockdown means that the number should rise again in the fourth quarter.
Banks fear loan defaults
The corona pandemic is thus becoming a stress test for banks. The longer the restrictions on economic life persist, the greater the risk that credit will default on a significant scale. The central institution of the cooperatively organized Volks- und Raiffeisenbanken, DZ Bank, is the second largest German bank. She had to quintuple her loan loss provisions in the first half of the year. In particular at the DZ subsidiary DVB, which specializes in the financing of transport and logistics companies, shaky ship loans required higher risk provisions.
Volksbanks appeal to the federal government
Against this background, the President of the Federal Association of German People’s and Raiffeisen Banks, Marija Kolak, demanded further help for banks and companies after the lockdown decision of the federal government this week: The state bank KfW should relieve the private banks and savings banks and their quick loans too spend to smaller companies with fewer than ten employees, she said. And the European Central Bank should decide at its meeting today to increase the allowances for the so-called graduated interest rate. This would enable banks and savings banks to pay less penalty interest on deposits with the central bank. That in turn makes it possible for banks to grant more loans.
In contrast to the financial crisis more than ten years ago, Corona hits the real economy directly and only secondarily the banks. Above all, it is the smaller businesses that cannot survive without the billions of government bailouts: gastronomy, trade fair industry and cultural organizers are all struggling to survive. They are all often customers of savings banks and Volksbanks: The plight of their customers can quickly lead to their own problems on the balance sheet.
Individual savings banks could run into problems
The mood at the savings banks is therefore tense. There the chief economists of the various banks within the savings bank group got together and published a joint statement. “The credit risk will increase in perspective, the financial institutions will have to walk a tightrope,” they write. They refer to the latest stress test by the banking supervisory authority for the around 1,400 “less significant institutions” in Germany, which include smaller savings banks and Volksbanks. It has been shown that even in the event of a severe economic slump, the financial institutions are “on average sufficiently capitalized”.
The fact that individual institutes come under pressure, have to be supported by the group or merge with others is a realistic scenario. The central question, add the chief economists, is not “whether there will be a burden on the banks”, but “how high this burden will be”. The risk depends very much on the individual loan portfolio.
Landesbanken as a weak point
The Landesbanken could once again turn out to be the weak point of the savings bank group. The Bayerische Landesbank had confirmed in mid-October that, due to the increasing risk provisioning, ten weeks before the end of the year it was unable to provide a forecast for its result for this year. How great the uncertainty is is also reflected in the results of other Landesbanken: At Nord LB, the provision for loan losses rose rapidly from one to 99 million euros at the end of the half-year. New figures will not come here until the end of November.
The leading institute from Baden-Württemberg, LBBW, reported an increase in risk provisioning from 63 to 281 million euros in the first half of the year and predicted a positive annual result in August. However, the authors of the annual report headed by bank chief Rainer Neske assumed “that a nationwide lockdown would no longer be necessary”. Exactly this prediction has now proven to be wrong, which could further weigh on the result. Internally, the bank has already activated its crisis committees such as the “Emergency Center” and the “Crisis Team” so that it can make quick decisions in cases of doubt.
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