Europe Offers Relief to Banks Still Hurting From Last Crisis

(Bloomberg) -- Europe moved to provide relief for its ailing banks as efforts to combat the coronavirus threaten to push more borrowers into default and disrupt lending.

The Bank of England on Wednesday announced a package of emergency measures, including a 50 basis point rate cut and a lower capital buffer to free up cash for lending. Germany’s banking watchdogs earlier discussed easing such buffers while the European Central Bank, which holds its policy meeting tomorrow, is expected to present its own crisis measures.

France already pushed regulators to go easy on lenders whose customers face difficulties repaying loans, and the issue may also be on the agenda when supervisors at the ECB meet later this month, according to one official, who spoke on condition of anonymity. An spokeswoman for the ECB declined to comment.

Policy makers are scrambling to find an response to a challenge that’s unlikely to be fixed by rate cuts alone, and which has revived memories of the last financial crisis. While Europe since fixed some structural issues and banks have strengthened capital, years of negative rates have left firms with weak profitability. Widespread lockdowns could prompt a surge in bad loans and test just how resilient they have become.

The issue is particularly acute in Italy, the epicenter of the outbreak in Europe. Prime Minister Giuseppe Conte is preparing to increase Italy’s fiscal stimulus program for the fourth time in a month, officials said, after the European Union agreed to stretch its budget rules to the limit to help member states fight the coronavirus.

Conte sent his entire country into lockdown Tuesday to fight the spread of the virus, a move that threatens to drive up soured loans in a banking system that’s still sitting on Europe’s biggest pile of bad debt. And while yields of government bonds elsewhere tumbled in recent days, Italy’s rose, suggesting some concern about the country’s financial ability to deal with the crisis.

The Italian Banking Association has urged European and Italian authorities for a one-year suspension of rules that force them to identify past-due loans as being in default, to free up more money to loan to firms hurt by the coronavirus outbreak. The government, meanwhile, is negotiating with banks to provide breaks from debt payments including mortgages.

Lenders in Germany, usually not a proponent of looser capital rules, are at risk, too, because they are among the least profitable in Europe. At Deutsche Bank AG, five straight years of losses have eroded its ability to offset unexpected hits to earnings. Commerzbank AG is one of the biggest lenders to the mid-sized companies that tend to rely heavily on foreign sales. It also owns about 9.5 billion euros worth of Italian sovereign bonds that could come under pressure if the crisis in Italy deepens.

‘Protracted Impact’

Europe is facing “a more protracted impact” from the virus crisis than previously assumed, according to analysts at Goldman Sachs Group Inc. The firm cut its aggregated profit estimates for European banks over the next four years by 30 billion euros, with Deutsche Bank, Commerzbank, UniCredit SpA and smaller Italian lenders seeing the biggest impact.

Officials from the German Finance Ministry met with BaFin and the Bundesbank on Monday to discuss easing the so-called counter-cyclical capital buffer for banks, Bloomberg reported. No decision wasn’t taken but it could come at any time as the crisis worsens. Germany has come in for criticism for implementing the buffer late.

A lobby group for German banks is also pushing for relief, according to people familiar with the matter. Their requests include exemptions from new accounting standards called IFRS9 that they believe could make the slump worse because they require banks to make provisions for potential losses much sooner than in the past, said these people.

Across Europe, financial firms are the worst-hit industry group, after oil and gas companies and travel operators, since stock markets peaked in late February. The violent declines speak to the many vulnerabilities of banks as the virus disrupts supply chains while a slump in oil prices threatens to put producers out of business. The risks for banks range from more borrowers defaulting, to less income from advising on deals and capital raisings, to trading desks that sit on volatile positions as markets go into freefall.

“Eurozone banks with lower starting profitability would see an outsized impact” from a virus-induced recession, Morgan Stanley analysts led by Magdalena Stoklosa wrote in a note on Friday. They singled out Deutsche Bank as the biggest victim, along with a few smaller lenders in Germany and Spain.

While analysts at Goldman Sachs said lenders in France and the Benelux countries were less impacted by the crisis, they are at risk from the slump in oil prices and potential spillover effects from Italy. Societe Generale SA, BNP Paribas SA, Commerzbank AG and ING Groep NV are among the banks with the highest risks, Bloomberg Intelligence analyst Jonathan Tyce said. Natixis SA and Credit Agricole SA are also facing risks, according to JPMorgan Chase & Co.

Banks’ exposures to virus-affected industries such as tourism, air travel and automotive could become a problem as well. Barclays Plc, BNP Paribas and HSBC Holdings Plc may face heightened risks, according to a note from Credit Suisse Group AG.

French Finance Minster Bruno Le Maire has urged authorities to relax rules on the classification of nonperforming exposures so that banks get more flexibility in dealing with struggling businesses.

“If we apply EU prudential rules too strictly, that means it will weigh on the balance sheets of banks and so banks will be nervous to delay loan maturities,” Le Maire said. “Markets are reeling, notably bank shares, which is another reason to show flexibility on this.”

Stress Tests

The BoE on Wednesday said they are introducing a new scheme to ensure companies can easily and cheaply access credit. The new Term Funding Scheme will include special incentives for smaller firms, and will be financed by the issuance of central-bank reserves. The central bank cut the countercyclical capital buffer to 0%. That’s a reserve held by banks, and the reduction should free up cash for them to lend.

Euro-area officials are also discussing the possibility of delaying this year’s bank stress tests so that supervisors don’t have to deal with outdated scenarios, two people familiar with the matter said, declining to be identified because the deliberations are private. The results of the exercise were meant to be published by the end of July.

Apart from the expected hit to credit quality, banks with major asset management operations will be vulnerable to the slump in equity markets. Credit Suisse analysts said that a sustained 10% drop in equity markets would be particularly painful for Swiss private banks such as Julius Baer Group Ltd. and UBS Group AG, which owns one of the world’s largest wealth management businesses, as well as lenders like Natixis and Deutsche Bank that have significant asset management units.

“We estimate as much as 20% could be shaved from 2020 earnings, given a low- to mid-single digit decline in net interest income, as margin and loan growth are squeezed, coupled with a spike in provisions,” wrote Tyce at Bloomberg Intelligence. “Earnings of Italian lenders, and those with most material oil exposure, are most at risk.”

--With assistance from Birgit Jennen.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Steven Arons in Frankfurt at sarons@bloomberg.net;Harry Wilson in London at hwilson57@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel

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