European banks’ NPLs go up as a result of COVID-19 crisis
The impact of the COVID-19 crisis has started to show in the quality of loans on European banks’ balance sheets. After a long trend of disposal-driven reductions, for the first time the NPL levels of some of Europe's largest banks increased quarter-on-quarter, a Debtwire analysis of the banks’ earnings reports shows.
The total NPL level of the largest banks in France, UK, Italy and Spain, which posted data on their non-performing or stage 3 (impaired) loans for both the latest quarters, was EUR 265.7bn in 2Q20, up EUR 6.4bn from EUR 259.3bn in 1Q20.
More banks had half year data, bringing the total volume at the end of 1H20 to EUR 285bn, down EUR 24.8bn from EUR 309.9bn as of 1H19.
France and the UK also saw year-on-year NPL increases, to EUR 64.6bn from EUR 63.7bn and the equivalent of EUR 51.4bn from 46.6bn, respectively. This confirms a trend already seen in the most recent European Banking Authority's (EBA) quarterly Risk Dashboard that both French and UK banks had increased NPLs from the end of 2019 to the end of 1Q20, as reported.
In France, BNP Paribas had the highest NPL level at EUR 24.4bn from EUR 23.7bn in 1Q20 and EUR 25.7bn a year before, as reported. In the UK, HSBC had the highest volume of Stage 3 loans at USD 17.1bn (GBP 13.87bn) as of 2Q20, up from USD 14.4bn (GBP 11.6bn), as reported.
Irish banks saw a 20% half-year jump to EUR 9.5bn at end-1H20, from EUR 7.9bn at end-FY19, mainly due to a spike of non-property SME and corporate NPEs according to Debtwire’s analysis of the results of the three pillar banks, Bank of Ireland (BoI), Allied Irish Banks (AIB) and Permanent TSB (PTSB), as reported.
In Spain, at the end of 1H20 total NPLs for the six largest Spanish banks were EUR 72.97bn, up 1.46% from EUR 71.92bn at the end of 1Q20, as reported.
The bank with the highest level of NPLs in Europe on its balance sheet was Santander Group with EUR 32.78bn of NPLs, up from EUR 32.74bn. The second highest level of NPLs in Europe was recorded by Italian Intesa Sanpaolo, which posted an NPL volume of EUR 29bn down from EUR 30.2bn from previous quarter.
Italian banks were a notable exception among European peers, having reported a QoQ decrease in NPLs. The six largest Italian banks together reported EUR 86.57bn at the end of the first half of the year, down from EUR 89.17bn the previous quarter and EUR 111.7bn in 2Q19, as reported.
In Italy the NPL portfolio market remained active even during the month of the COVID-19 lockdown. Italian banks executed the majority of NPL sales in 1H20, according to the most recent Debtwire European NPLs Report, at EUR 18.2bn out of EUR 30.4bn of completed deals across Europe, thanks in large part to bad bank AMCO and the state guarantee programme, GACS.
Banks are facing pressure to move ahead with sales of legacy NPLs due to the strong possibility of a new wave of distressed debt. A recent study from Oliver Wyman stated that European banks face more than EUR 400bn of credit losses in the next three years, “two and a half times the total provisions made over the previous three years, a period of relatively low losses”.
According to the study, Italy's NPL ratio could go up to 13.2% from less than 8.9% before COVID-19, Spain's to 8.4% from less than 4%, France's to 8.1% from less than 3.4%, and the UK's to 6.8% from less than 2.1%.
Provisioning levels more than tripled year-on-year across Europe, with EUR 26bn allocated in 2Q20, 3.3x greater than the EUR 7.9bn seen in 2Q19.
Taken together with the first quarter, 22 banks analysed by Debtwire provisioned EUR 47.5bn over the first half of 2020. Provisions in 2Q20 exceeded the first quarter by 20.9%, when EUR 21.5bn was put aside by the banks, as reported.
Top UK Banks, HSBC, Barclays, NatWest and Lloyds, once again set aside the highest volumes of provisions, with EUR 10.1bn provisioned between them, a massive 6.3x increase on the EUR 1.6bn provisioned in the same period last year. HSBC, Europe’s largest bank, set aside the highest volume in 2Q20, EUR 3.4bn.
Spanish banks continued to make large provisions, setting aside EUR 5.2bn in 2Q20, a 2x increase on last year. More than half was accounted for by Santander Group’s EUR 3.1bn. Of Santander’s EUR 7.02bn booked this half year, EUR 2.43bn was for South America, EUR 2.36bn for North America and EUR 2.21bn for Europe, as reported.
However, Spain was the only country surveyed to provision less this quarter than the previous quarter, when the banks set aside EUR 6.2bn.
France’s top four banks increased their provisions 2.5x year-on-year to EUR 4.9bn from EUR 1.9bn. Italy’s largest banks near-doubled their provisions, to EUR 2.8bn from EUR 1.6bn.
Compared with the previous quarter, the banks’ allocations were only moderately increased, by factors of 1.4 and 1.3, from EUR 3.6bn and EUR 2.2bn, respectively.
The banks surveyed in France noted that most of the provisions had been allocated based on forecasts rather than a decline in asset quality, as reported.
Having shied away from significant volumes last quarter, Irish banks made significant proportional increases in loan loss provisions this quarter, as reported, setting aside EUR 1.8bn in total, up 3.7x from just EUR 476m in the first quarter.
Last year, Bank of Ireland set aside just 41m in 2Q19. Allied Irish Banks and Permanent TSB did not release separate figures by quarter, but set aside EUR 9m and EUR 5m respectively, for 1H19.
The top three banks in the DACH region, Deutsche Bank, Credit Suisse and UBS, also made large proportional increases, to EUR 1.3bn in 2Q20, 6.6x the levels in 2Q19, roughly EUR 200m. The total level was constant in the last two quarters.
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Alessia Pirolo is Head of NPL Coverage at Debtwire ABS. From a previous focus on Southern European Commercial Real Estate, she is now in charge to expand Debtwire's NPL coverage areas around the world. Before joining Debtwire, she covered U.S. and European commercial real estate for The Wall Street Journal, and the Commercial Observer. She holds a master’s degree from the Columbia University Graduate School of Journalism.
Amy is a data journalist for Debtwire. She covers the sale of NPLs and non-core loans, with a focus on Irish and UK markets and unsecured loans.