Euro-banks offer glimpse of possible bad-debt wave
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, July 24 (Reuters Breakingviews) -The recent rate-hike cycle in Europe and the United States has been one of the fastest in history, yet borrowers don’t seem to have felt much pain. Fixed debt costs, benign financial markets and continued low unemployment all help to explain this surprising fact. Yet euro zone bank results on Wednesday will give pessimists reason to think the bad-debt wave will eventually break.
Deutsche Bank DBKGn.DE, for example, said that its full-year loan-loss provision would equate to slightly more than 30 basis points of average total loans, compared with a previous target of slightly below. The charge is effectively the money that lenders set aside to cover expected future losses from borrower defaults. It’s only a small change, but the news contributed to an initial 7% share-price fall for the 30 billion euro bank.
France’s 70 billion euro behemoth BNP Paribas BNPP.PA added to the trend on Wednesday. Its second-quarter cost of risk, which is the name that many euro zone banks use for the bad-debt charge, spiked 23% year-on-year to 752 million euros. UniCredit CRDI.MI and Banco Santander SAN.MC, which also reported on the same day, showed no signs of overall credit problems. But there are still some worrying signs, however: the Italian bank led by Andrea Orcel tripled its loan-loss provision in Germany relative to the second quarter of 2023, for example.
There are reasons not to panic. Deutsche and BNP flagged specific stress among a very small number of corporate clients, rather than broad-based problems. It’s possible that just two situations explain the majority of the second-quarter hits reported by the three banks: a messy debt restructuring at Paris-based Atos ATOS.PA, and financing problems at German agricultural trader BayWa BYWGnx.DE. Deutsche mentioned commercial real estate too, but the incremental bad news there is minimal: the bank’s related bad-debt charges have stayed flattish, rather than falling as hoped, and those losses reflect declines in the value of property collateral, rather than a surge in borrower defaults.
Another way of looking at it, however, is that these situations are just a sign of what’s to come. The European Central Bank only stopped hiking rates last autumn. Monetary policy often takes months or years to affect financing conditions on the ground. Traders reckon that ECB rates will still be close to 3% this time next year, based on money-market prices gathered by LSEG, which is much higher than just two years ago when they were negative. Growth is also sluggish in Europe. The longer that lasts, the more that bank investors will fear that bad-debt shockers will become the norm.
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CONTEXT NEWS
Deutsche Bank on July 24 said its full-year credit-loss provisions would be “slightly above” 30 basis points of total lending, compared with previous expectations of between 25 basis points and 30 basis points of the loan book. That charge is effectively the money that banks set aside to cover expected borrower defaults.
BNP Paribas on the same day reported second-quarter results that showed its equivalent charge, called the cost of risk, rising 23% year-on-year to 752 million euros. The French bank cited a “specific credit situation” during the period.
UniCredit and Banco Santander, which also released results on July 24, showed no overall sign of default stress in the loan book. But the Italian bank’s German unit showed a near-tripling of its second-quarter loan-loss provisions compared with a year earlier.
Shares in Deutsche Bank fell almost 7% to 14.65 euros as of 0838 GMT on July 24. UniCredit and BNP were down roughly 2%, while Santander’s shares rose by slightly more than 1% as of the same time.
Euro zone banks' modest recent bed-debt charges https://reut.rs/4bZjrRF
Editing by Neil Unamck and Streisand Neto
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