Intermoney | The ECB has published devastating data on the Eurozone banks. It revealed a ROE of 0.01% in Q2’20 compared with 6.01% a year earlier; a figure that was negative in the major institutions in 7 of the 19 countries in the euro area. In this context, non-performing loans remained almost stable at €503 Bn, allowing the NPL rate of the large banks in the EMU to fall to 2.94%. This was in a fictious manner, however, as it was thanks to state guarantees and, above all, the moratoriums on loan payments.
The European banking landscape does not look much worse six months into the pandemic-triggered economic crisis than before Covid-19 struck. Loan-loss provisions are higher, there is negative pressure on top-line revenues and gloomy market predictions linger. But the prospect of a new banking crisis is remote. The principal merit goes to the regulatory architecture set up in Europe after the Great Financial Crisis.
The European Central Bank has decided to allow the lenders it directly supervises in the region, on a temporary basis until June 27, 2021, to exclude certain exposures to the central bank from their leverage ratio. In this way, the institutions will have more room to incur debt since the ECB will not require more capital for it. In fact the ECB will not take into account the liquidity (cash and deposits) banks hold at the central bank when calculating the leverage ratio (Capital/Assets).
EU agreement on a pandemic fund boosted market and regulators’ wishes to move towards cross-border consolidation among European banks- the ECB’s vice-president, Luis de Guindos, has already warned of the need for the sector to continue with the merger process. Scenarios have started to be built again about who should be merging with whom. But unity around the EU pandemic fund is not about banks, say analysts at Scope Ratings.
The ECB has finally decided to extend from 1 October this year until 1 January 2021 the recommendation to banks to not pay dividends to their shareholders. Nicolas Hardy, Analyst of Financial Institutions at Scope, thinks this measure is positive in the short term, but could be questioned in the long term as EU banks are facing different operating conditions in the wake of the pandemic.
Santander Corporate & Research | Yesterday, the European Banking Authority published its 2020 transparency exercise, which takes data from individual banks at end-2019. The EBA’s findings indicate that the EU weighted average CET1 fully loaded capital ratio stood at 14.8% in Q4’19. Also yesterday, the European Systemic Risk Board (ESRB) published a second set of measures adopted in response to the coronavirus emergency, which include a recommendation to restrict capital distributions until January 2021.
Santander Corporate & Investment | Yesterday, the European Banking Authority (EBA) published a report with a preliminary assessment of the Covid-19 impact on the EU banking sector. The EBA flags up the fact that banks “entered the health crisis with strong solvency and liquidity reserves and managed the pressure on operational capacity by activating their contingency plans”. It also flags that “the crisis is expected to affect asset quality and therefore the future profitability of banks.
Andrea Enria, the President of the European Central Bank (ECB) Supervisory Board, said in an interview that he expects banks to keep back over $27 billion of the $35 billion they planned to distribute in dividends as capital on their balance sheets. In addition to this, Enria said the institutions have also cancelled their current and planned share buy-back programmes
Sam Theodore (Scope Insights) | The pandemic is fast pushing the European banking sector into a new and different stage; one that none of us could have anticipated. At this time there is no reason for credit investors to fear outright bank failuressincethis is not a copycat of the last financial crisis.(Even so and rather surprisingly, the risk of default for European banks is high in several credit-strategy models). There is, however, a clear need to reassess some of the underpinning rationales for investing in the debt of European banks.The dynamics of the landscape a rechanging and a return to the past is not likely anytime soon.
The new European Banking Authority (EBA) proposal will be analysed and discussed by the parties involved up until April 30, with a public discussion session on February 21. It will give banks more room for manoeuvre in the calculation of their projections. That said, the agency has insisted standards will have to remain high. The banks will have to continue detailing capital requirements, major risk factors or exposure data.