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Largest European banks set aside EUR 21.5bn provisions for NPLs to increase

European banks have been preparing for a new wave of bad loans due the COVID-19 crisis. In the first quarter of 2020, Europe's largest banks set aside more than EUR 21.5bn of provisions to cover losses from bad loans, up 207% from EUR 7bn in the same period in 2019, as they brace for a financial fallout due to the virus.

What could be the increase of non-performing loans, with most market players expecting to see a blow-up by next year? European NPL levels could go back to previous record highs seen after the 2008 financial crisis, an analysis by online trading platform NPL Markets shows.

The European Commission and Basel Committee on Banking Supervision have told banks to not mechanically apply their existing Expected Credit Loss (ECL) approaches in an exceptional situation such as the coronavirus pandemic.

 Banks have started to set aside large amounts to face potential losses. UniCredit Group stated in its earnings report it is setting aside EUR 1.2bn loan loss provisions of which EUR 900m were due to COVID-19 potential losses. Crédit Agricole Group tripled its provisions to EUR 930m from EUR 281m in the same period of 2019.

The highest increase was for the largest UK and DACH banks, which saw an overall 450% increase in provisions compared to last year. UK banks set aside the equivalent of EUR 7.7bn of provisions, with EUR 2.7bn by HSBC and EUR 2.4bn by Barclays.

The largest provision was by Spanish bank Santander, a total of EUR 3.9bn, of which EUR 1.6bn were specifically due to coronavirus effects. Spain's four largest banks had EUR 6.2bn of provisions together, up 129.6% from EUR 2.4bn in 1Q19.

Italy's second-largest bank, Intesa  Sanpaolo set aside EUR 409m of net adjustments to loans and another EUR 419m of provisions and net impairment losses on other assets, which included EUR 300m for risk related to the COVID-19 epidemic.

European banks’ NPLs fell to a record low of EUR 584bn at the end of 2019, down from EUR 618.7bn in September, according to the European Banking Authority (EBA)’s quarterly Risk Dashboard.

Trading platform NPL Markets’ analysis has calculated the potential hit on banks’ NPLs based on expected drops in their respective countries' GDPs.

Italian NPLs could go up to EUR 352bn from EUR 115bn at the end of 2019, with the NPL ratio jumping to 20.3% from 6.7%, while Greece could see its efforts of recent years erased with NPL levels going up to EUR 106bn from EUR 70.5bn, and its NPL ratio jumping to 53% from 35.2%, according to the analysis.

Spanish NPL volumes could go to EUR 259bn from the current EUR 79.2bn and the NPL ratio to 10.6% from 3.2%.

For France, the worst-case scenario prediction is that NPL volumes treble, to EUR 360.7bn from EUR 120.2bn, and NPL ratio to 7.5% from 2.5%.

In the UK, NPL Markets sees a possible increase in bad loans to EUR 262bn and ratio to 4.1% from 1.3%. In Germany, the volume could go up to EUR 79bn from EUR 30bn, and the NPL ratio to 3.3% from 1.9%, according to NPL Markets' analysis.

Alessia Pirolo Head of NPL Coverage Debtwire Bio
Amy Finch Data Journalist Debtwire Bio