European Banks Seek to Avert Stashing Billions for Bad Loans

(Bloomberg) --

European banks are seeking to avoid setting aside billions of euros to cover bad loans after the coronavirus outbreak, in a departure from U.S. competitors collectively taking a $25 billion hit.

European lenders are set to report comparatively small increases in loan loss reserves in the first quarter and plan a similar approach during the rest of the year, according to senior bankers and regulators, who asked not to be identified because the earnings figures have yet to be released. They have the blessing of regulators to be flexible applying rules to avoid a spike in provisions.

Banks are in talks with auditors and rivals to determine which economic forecasts can be justified to avert stashing large amounts of money, people with knowledge of the matter said. Using forecasts that are less severe would reduce the amount they need to set aside, while massive government guarantees are also making it easier for banks to assume lower default risks, the people said. European banks will likely try to spread out provisions over a period of 18 months, according to one of the people.

Europe is facing its deepest recession in living memory, forcing governments to enact wide-scale rescue plans. As a surge in bad loans would hit a banking industry already weakened by several years of poor profitability, regulators have also encouraged lenders to make use of flexibility in accounting rules to avoid a sharp increase in provisions and ensure that they can keep lending to companies.

“Regulators have told banks not to apply accounting rules too strictly,” Alexandra Annecke, who helps manage more than 340 billion euros ($372 billion) including European bank stocks at Union Investment, said in a phone interview. “We’re asking ourselves just how much the results will correspond with reality.”

Geography also matters when assessing the impact of the virus as countries such as Italy and Spain have endured the most deadly outbreaks.

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“There is enough visibility on the economic deterioration expected for 2020 that banks could (indeed, should) start building additional provision reserves” in the first quarter, Daragh Quinn, an analyst at Keefe, Bruyette & Woods, wrote in a report on Spanish banks on Friday. “Although we think it more likely that the peak of provisions will come in the second half of this year or in 2021.”

European bank earnings season gets underway next week with Switzerland’s Credit Suisse Group AG the first major lender to report on April 23 and big competitors in the euro area following in the days and weeks thereafter. The big U.S. banks have been releasing their earnings in recent days.

UBS Group AG said last week that it recorded its strongest quarter in two years, giving investors a first glimpse into European lenders’ performance during the early days of the crisis. ABN Amro Bank NV said at the end of March that it expects to post a first-quarter loss after the cost of risk jumped and its clearing business suffered a virus-related pretax hit of $250 million.

Crisis Preparation

Other lenders have signaled preparations for difficult times ahead. Banks across the European continent and the U.K. have postponed dividend payouts and share buybacks, suspended job-cutting plans and reduced executive pay and bonuses.

The approach expected to be adopted by European banks is in stark contrast to the stance taken by rivals in the U.S., where the top five lenders set aside about $25 billion in the first quarter for expected bad loans. That included $8.29 billion at JPMorgan Chase & Co., the biggest provision in at least a decade and more than double what some analysts expected.

Another reason banks in Europe won’t take large provisions is because they are far less profitable than their U.S. peers and can’t afford to do so, according to a senior European banking regulator who asked not to be identified because of the sensitive nature of the discussions.

U.S. banks were able to cushion the effect of higher provisions with a jump in revenue from trading stocks and bonds in the first quarter amid the wild market swings following the outbreak.

Banks’ assessments of how the wider economy will fare are a crucial metric in determining how much money they need to set aside. The European Central Bank, which oversees the euro area’s biggest lenders, has signaled that it would be sympathetic to optimistic projections.

The ECB “would not object” if lenders assume in their risk provisioning that there could be an economic rebound this year, it said in a recent letter to banks. It also encouraged them to use its latest macroeconomic projections, which predate the effect of the lock down, as “anchor points.”

©2020 Bloomberg L.P.