Large banks across Europe, Japan and the US are all expecting significant costs from souring loans in the coming year.
The world’s largest financial institutions in Europe, Japan and the US have set aside billions to cover the cost of souring loans, in significant part due to the economic impact of the Covid-19 pandemic.
Such provisions, outlined in the first quarter financial results for US and European banks and the full year, up to March 31, 2020, results for Japanese banks, are the largest since the 2007-08 financial crisis. They indicate the scale of the financial disruption that banks are expecting to face due to the coronavirus outbreak.
Differences in accounting practices make direct comparisons between different jurisdictions difficult, but it seems US banks are being particularly cautious, with the five largest banks collectively boosting their provisions for credit losses almost fivefold compared to last year. JPMorgan Chase and Citigroup have the most set aside, at $8.285bn and $7.027bn, respectively, up from $1.495bn and $1.980bn last year.
Europe’s largest bank, HSBC, reported in its first quarter 2020 results that it has set aside $2.4bn to cover the cost of expected credit losses due to Covid-19 and weak oil prices. French banks Crédit Agricole Group, BNP Paribas and Groupe BPCE – Europe’s second, third and fifth largest banks by Tier 1 capital, respectively – each saw their ‘cost of risk’ increase by €649m, €657m and €211m year-on-year. All three cited the Covid-19 pandemic as a significant factor.
Japan’s three largest banks have collectively forecast that they will face costs of Y1100bn ($10.3bn) in the coming financial year, running from April 2020 to March 2021. The two largest banks, Mitsubishi UFG and Sumitomo Mitsui, each expect to face credit costs of Y450bn, while Mizuho expects costs of Y200bn.
These figures are expected to shift throughout the year as the scale of the economic disruption becomes clearer. While many countries are now in the process of ‘reopening’ following lockdown measures, it is unclear to what extent and how quickly economies will be able to bounce back. There is also potential for any recovery to be thrown off course by a so-called second wave of infections.
Several banks have already warned that credit loss provisions could grow significantly on top of what has already been put aside – the scale of the issue will become clearer with the start of second-quarter reporting for the US, and then Europe, in the coming weeks.
