Europe’s banks withstand the COVID-19 pandemic
The global COVID-19 pandemic and the associated negative economic effects continue to have a firm hold on Europe’s banks. The risk costs of many institutions have risen significantly during the first and second quarter of this year, with a corresponding negative impact on profitability. Furthermore, capital ratios of the 50 largest banks in Europe are likely to fall in view of the expected rating downgrades of their customers and the increase in non-performing loans. This crisis will strongly affect certain selected institutions based on the specific industry structure within their credit portfolio and their regional presence. Nevertheless, from today’s point of view, we expect European banks to largely overcome the challenges of the COVID-19 crisis and do not anticipate a structural banking crisis such as in 2008/09.
These are the core results of the latest edition of zeb’s European Banking Study (EBS). The strategy and management consultancy once again examined in detail the financial statements of Europe's 50 largest banks at the end of the second quarter, this time focusing on the institutions’ capitalization and calculating corresponding simulation scenarios. The first issue of EBS 2020 in June mainly addressed the profitability and, in particular, loan loss provisions, in the lending business of Europe’s top banks.
Adequate CET1 ratio in the first half of 2020
The updated EBS details the serious consequences of COVID-19 for the financial industry. The average CET1 ratio of the 50 largest European banks initially fell to 14% in the first quarter of 2020 (2019: 14.4 ). The main drivers were an increase in new loans, customers drawing on credit lines and, in some cases, negative profits stemming from higher loan loss provisions. This effect, however, was completely reversed in the second quarter of 2020, mainly due to lower risk-weighted assets (RWA) and the suspension of dividend payments.
Dr. Ekkehardt Bauer, Senior Manager and co-author of the zeb study, adds: “Overall, banks’ capitalization of 14.4% at the end of the second quarter is well above regulatory and market requirements. In addition, regulators provided further breathing room through eased capital requirements in response to the crisis. In this respect, Europe’s financial institutions prove to be solid.”
Profitability declines in the first half of the year
A look at the profitability of Europe’s top institutions paints a different picture. In 2019, the average post-tax RoE was 6.4%, whereas in the course of 2020 so far, profits have declined significantly, mainly driven by sharp increases of LLPs. In the first quarter, the institutions still achieved an average RoE of 2.2%; in the second quarter, this figure actually turned negative at -0.3%. At the end of the second quarter of 2020, LLPs were already higher than the total annual figure for 2019.
Christian Schiele, Partner at zeb and co-author of the study, explains: “When taking a closer look at the banks individually, however, we obtain a more differentiated overview. In fact, there are several institutions with solid capitalization and profitability. Others, on the other hand, struggle with serious consequences. Their profit cushions to absorb effects from the pandemic have already reached a very low level.”
Capitalization will remain on a sufficient level in the future
Various simulation scenarios within the framework of zeb’s updated European Banking Study show that expected losses and risk-weighted assets (RWAs) are likely to increase significantly in the coming years. Despite the resulting drop in capital ratios, however, the average CET1 ratio of the 50 largest banks in Europe will remain at a level above the minimum regulatory requirements. In the most probable scenario, we assume that eight of the 50 largest institutions will be forced to use the capital buffers released by regulators in 2020. In the severe scenario, we expect this number to grow to 18 banks.
Dr. Dirk Holländer, Senior Partner at zeb and co-author of the study, adds: “Our current analysis indicates that the impact of COVID-19 and the resulting economic downturns should not lead to a general financial crisis across the entire banking sector.”
Bank portfolio determines vulnerability to COVID-19 crisis
The updated EBS also concluded that in view of the impact during the crisis, there are no clear patterns with regard to specific business models or countries or regional exposure. Although individual institutions are systematically in a better position, there are serious individual effects in particular for those with a high proportion of customers from industries heavily hit by the crisis. Primarily specific characteristics, such as the size and structure of the portfolios, determine the individual COVID-19 effects. From the authors’ point of view, individual evaluations and measures on single bank level are therefore essential, rather than taking a scattershot approach across certain business models or countries. These measures particularly include the restructuring, resizing and realignment of credit portfolios.
Dr. Dirk Holländer sums up: “On average, the European banking sector has been weathering the storm of the COVID-19 crisis so far. Nonetheless, vigilance remains critical. The alliance between regulators, governments and banks should be continued. These measures are the only way to prevent possible future credit or liquidity crunches. This is essential, both at the present time and when the economy picks up, to supply the real economy with appropriate investment loans, thus ensuring that the original economic potential path is regained.”
Further information on the current zeb study is available here.
As a leading strategy and management consultancy, zeb has been offering transformation expertise along the entire value chain in the financial services sector in Europe since 1992. In Germany, we operate offices in Frankfurt, Berlin, Hamburg, Munich and Münster (HQ). Our international locations are in Amsterdam, Copenhagen, Kiev, London, Luxembourg, Milan, Moscow, Oslo, Stockholm, Vienna, Warsaw and Zurich. Our clients include European large-cap and private banks, regional banks, insurers as well as all kinds of financial intermediaries. Several times already, our company has been classed and acknowledged as “best consultancy” for the financial sector in industry rankings.
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