Intesa, Head of UniCredit for Calculating the End of Covid Loan Vacation
Banks in vulnerable southern Europe are about to discover the true extent of damage to their loans from the economic crisis of the pandemic.
Hundreds of thousands of businesses and households in countries like Italy and Portugal are resuming interest payments on loans that were frozen when lockdowns threatened their livelihoods. Many borrowers in hard-hit sectors like tourism are therefore at greater risk of default, according to Fitch Ratings Inc.
Italian lenders Intesa Sanpaolo SpA and UniCredit SpA have some of the biggest piles of loans with suspended payments. Regulators have repeatedly warned that banks are not taking the looming rise in bankruptcies seriously enough with growing optimism about the vaccine-induced recovery.
Credit quality is particularly uncertain in countries like Cyprus, Italy and Portugal, Bernhard Held, chief credit officer at Moody’s Investors Service said in a May 11 report. “The remaining loans with moratoriums will be the main pockets of potential credit deterioration.”
Lenders across the continent have posted a near net balance sheet earnings above expectations in the last quarter, with executives adopting a much more optimistic tone than regulators about the need to set aside cash for future credit problems. These lower provisions boosted earnings and the prospect of dividend payouts to investors.
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Borrowers in Germany and the Nordic countries have resorted less to loan suspensions and most of them have already expired. This means that while northern European countries have mostly faced the hidden risks of loan moratoriums, the math is yet to come further south.
“I expect the entire credit portfolio to deteriorate, even if the loans don’t necessarily become non-performing,” said Marco Giorgino, professor of finance and risk management at MIP Politecnico di Milano, in a statement. interview.
Second quarter results will show how well southern European banks have provisioned themselves, with much of their remaining moratoria set to expire. UniCredit said it would see 16.2 billion euros ($ 19.8 billion) out of a total of 18.9 billion euros in frozen loans to restart payments during this period. For Santander, that’s around € 7 billion of the remaining € 16 billion in deferred loans.
Borrowers in sectors most affected by the pandemic, such as hospitality, education and entertainment, have made greater use of payment holidays, according to at European banking authority.
According to European Central Bank. In some cases, banks have amended loans that do not meet the criteria for moratoriums without flagging them as forborne. “This could potentially mask the real risks on the books of banks,” the ECB said on Wednesday.
A further rise in bad loans can undo years of cleanup after the financial crisis, when regulators pushed lenders to restructure and get rid of non-performing loans.
Still, most banks report being relaxed about the potential impact on asset quality of phasing out credit protection. Many say borrowers who came out of moratoriums generally kept up with payments.
The situation “is totally under control” for both Intesa and other Italian banks, said Intesa CEO Carlo Messina, whose bank has around 30 billion euros in loans still under moratorium, in an interview with Bloomberg TV May 11. Client-by-client analysis on all clients under moratoriums, “and they have a lot of cash in their accounts,” he says.
The Italian lender recorded an average default rate of 1.5% on all of its expired moratoria, according to its first quarter results.
Further relief for banks has been granted by European governments in the form of guarantees. States were behind nearly 350 billion euros in loans at the end of last year, according to an EBA survey, shifting all or part of the risk of default from banks to taxpayers. The benefits of these guarantees will also last longer than with the moratoriums. Almost a quarter of Italian guarantees expire between two and five years, according to data from ABE. For Spain, the proportion is 90%.
“Countries where bad loans are high, such as Greece, Ireland, Italy and Portugal, which have resorted more to moratoriums schemes will face higher inflows of new bad loans, ”Fitch analysts, including Francois-Xavier Deucher, wrote in a report.
(Updates on ECB comments on banks underestimating risk in 10th paragraph)