The banks are threatened with a significant deterioration in the quality of their loans in the coming months. The risk of bad loans and increasing bankruptcies could become a serious problem.
Banks are among the big losers in the corona pandemic. After a brief recovery since April, the warning lights are flashing again for the industry. The exponential growth of new Covid-19 infections hits them too. Banks are sensitive to economic tensions.
The industry is also struggling with other problems. “The banks in the EU are too unprofitable, too expensive and sometimes without a viable business model”, recently criticized Andrea Enria, head of the ECB banking supervision and warned: “The banks have to adjust to an increasing number of non-performing loans.” In the worst case, credit defaults threaten Trillions.
Credit and bankruptcy risk
“The quality of the credit is still under control, but Covid-19 has severely affected the macroeconomic environment, which will lead to a deterioration in credit quality in the next few quarters,” says Barbara Mainieri, credit analyst at Degroof Petercam Asset Management (DPAM). How much the number of non-performing loans will rise in the EU currently depends primarily on fiscal support and deferrals in debt repayment.
While debt repayment moratoriums and other borrower-friendly measures support the quality of bank loans, they also mask the plight of many borrowers. “The quality of bank loans could turn out to be much weaker than the numbers suggest,” says Mainieri. On average, European banks have 15 to 20 percent credit exposures in sectors hardest hit by COVID-19. If the quality of the assets drops significantly, Mainieri also sees the stability of national banking sectors as threatened.
The Deutsche Bundesbank also fears problems due to increasing bankruptcies of companies that have so far been able to drag themselves through the Covid 19 crisis thanks to state aid measures: “Precisely because the bankruptcies were at a historically low level in the past decade, the capacities may not be sufficient to deal with to be able to deal with rapidly increasing insolvency figures.
Risk zones in the EU
In some European regions, where the rate of growth of bad loans is higher on average, the risks should not be underestimated. Since the beginning of the COVID-19 crisis, the credit ratings of several European banks have been downgraded and often given a negative outlook.
In some cases, this was exacerbated by the country risk, such as Italy, Belgium, France and the UK, which dropped out of the EU. For example, the Italian Bankers Association announced that the average level of non-performing loans in the country is still above the five percent target set by the European Banking Authority, despite the fact that risky loans have been reduced by 130 billion euros over the past five years.
The major Spanish bank Santander is tightening its austerity course in view of the corona crisis and low interest rates and is planning to cut thousands of jobs. Additional savings of one billion euros are planned by 2022.
SMEs and private individuals find it more difficult to obtain loans
Many banks are already taking action and are more restrictive in granting loans than they were before the crisis. In Germany, for example, according to the Bundesbank’s “Credit Lending Survey”, small and medium-sized companies are clearly feeling the greater caution of financial institutions in granting and structuring loans. Banks are much more restrictive towards them than towards large companies Sectors affected by the crisis and new customers in particular find it difficult to get a loan, ”said the Bundesbank.
Private customers are also affected. The Bundesbank speaks of a “comparatively high rejection rate”. With interest in housing loans soaring, after a sharp slump in the second quarter. The banks were even stricter when it came to consumer loans, for which, as in the previous three months, a net share of 27 percent more applications were rejected.
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