The global financial crisis meant banks spent 2009 recapitalising. As a result, the aggregate Tier 1 capital of the Top 1000 World Banks has increased by 15%. However, The Banker’s research shows that provisions for loan losses – which provide a crucial indicator of a bank’s ability to absorb writedowns – are likely to continue to impact on banks’ profits across the globe.
Sizeable provisions are a prerequisite for banks trying to safely navigate the potential second wave of writedowns. According to The Banker’s data – based on information submitted for the Top 1000 World Banks 2010 ranking – provisions for loan losses for 2009 have reached about $301.5bn in Europe (of which at least $215bn is for the eurozone), $250bn for North America, and $55bn for Asia (excluding China, for which no data is yet available).
In Europe, writedowns are expected to reach $90bn in 2010 and $105bn in 2011, according to the European Central Bank’s latest Financial Stability Report. While the overall resilience of the financial sector has increased – taking into account that capital buffers have been strengthened – this is not unexpected, said Lucas Papademos, vice-president of the ECB in the report. “Although writedowns on loans will decline, they will continue, simply reflecting the overall performance of the economy,” he says.
An examination of non-performing loan ratios reveals the ramifications of the ‘originate to distribute’ lending model. In regions where this model was popular NPLs have soared, averaging 4.41% in the US and 4.25% in Europe. For the top 10 US banks – which dominate lending in the country – NPL ratios are even higher, reaching a whopping 6.6%. According to data from PricewaterhouseCoopers, NPLs in the eurozone increased more than 45% from 2008 to 2009. Clearly, those regions where the ‘originate to distribute’ model was not commonly used have suffered less as a result; the average NPL in Asia is only 2.41%, for example.
Comparing provisions as a percentage of total loans on a regional basis reveals that there is a huge disparity in NPL coverage ratios across the globe.
That said, regional comparisons are often not straightforward. Dramatically different ratios can sometimes be explained by difference in collateral requirements. While high levels of collateral reduce the need to provision for 100% of potential loan loss, they are not accounted for in provision or NPL figures.
Additionally national regulations vary. The Spanish Central Bank, for example, recently passed a law forcing Cajas (mutual savings banks) to increase their coverage ratios to 100% in the 12 months following their disclosure: 25% up to six months; 50% between six and nine months; 75% between nine and 12 months; and 100% by the twelfth month.
However, some worry that forcing banks to provision higher levels of capital based on their recorded NPLs might discourage banks from disclosing high NPLs – and may even lead to unwise loan modifications as a way of reducing potential losses.
The rise of NPLs is likely to be an ongoing story in some regions. With growth sluggish at best in the eurozone and the US, many pessimists argue that the only for the numbers to go is up. And if banks have to provision more, this will further reduce return on assets.
