European Banks Facing Over €400 Billion In Credit Losses In The Next Three Years

With COVID-19 exposing any weaknesses in the financial services industry, European banks face over €400 (£363) billion of credit losses in the next three years. This figure could double to €800 (£725) billion in the case of a second comprehensive lockdown.

These credit losses are two and a half times the total seen by the industry over the previous three years but are less than 40 per cent of the losses experienced in the global financial crisis of 2008-10, and a similar overall level to the Eurozone crisis of 2012-14.

This is according to “Aim for Revival. Not just Survival.”, a new European banking report by Oliver Wyman, the global management consultancy.

As well as credit losses, revenues in the banking industry are expected to fall by €30 (£27) billion by 2022, as net interest margins and fee income go into reverse at the same time in both retail and commercial banking.

The report reveals the shape of the future banking landscape in the European Union and the United Kingdom. Five per cent of banks are expected to be “troubled” in 2022, with capital below minimum levels and profitability too weak to rebuild. Over half of the capital in the system will sit in banks that are in “limbo”, with enough capital to meet regulatory requirements but generating weak returns, vulnerable to further capital hits, tending to be risk-averse in lending, and struggling to fund transformation efforts.

Christian Edelmann, Co-Head of EMEA financial services, Oliver Wyman, said: “The pandemic is unlikely to cripple the European banking sector, however many banks will be pushed into a “limbo state”, with very weak returns.  Ambitious restructuring efforts will be needed, but to succeed they will need engagement and support from policymakers and regulators. That includes agreeing transformation plans with short-term capital impacts, encouraging consolidation to happen more quickly and accelerating single banking market efforts. The alternative is a system that struggles to support economic growth and falls behind the rest of the world.”

David Gillespie, UK & Ireland Head, Oliver Wyman, added: “The small group of large UK banks entered the crisis in a relatively strong position, with average core capital ratios (CET1) of over 15 per cent and returns on equity of over 7 per cent, both above European averages. The vulnerability comes from overleveraged consumers and corporates that have been wounded by the UK having one of the biggest economic hits so far. Our central case is that government support will have softened the blow to the banking industry, leading to a decline in capital ratios of just ~1ppt by 2022. Banks will need to intensify their cost-cutting efforts and manage credit losses carefully, but it is not currently likely that the industry will need radical restructuring as in the global financial crisis.”

The report also looks at the actions banks will have to take to survive, including significant cost-cutting, balance sheet reduction, and scaling up teams dealing with customers that are in default on their loans. It concludes that if Europe wants a modernized, resilient banking system that can support the communities hit hardest by COVID-19 and accelerate the green transition, then it will take a collective endeavor with top-down political support. It also warns about what the industry will look like across Europe if it fails to deliver.

About the analysis

Oliver Wyman’s European Banking Report uses proprietary models to estimate future bank economics, taking into consideration retail and corporate default rates, provisions, risk weighted assets, earnings and other key banking metrics. Overall figures are shown at the European level (UK, EU and Norway), as well as a business line earnings outlook, and granularity on bank earnings and balance sheets impacts on nine European countries – the UK, France, Germany, Spain, the Netherlands, Italy, Sweden, Greece and Portugal.

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 60 cities across 29 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a business of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.