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US banks USA And Europe is on track to set aside more than $ 50 billion in sour loan charges in the first quarter, the largest such provisions since the 2008-09 financial crisis, and an indication of the serious economic damage caused by the coronavirus.
The headline numbers mask dramatically different approaches across the industry, raising questions about how rigorous some banks are in evaluating potential future losses.
Among the largest institutions, US banks. USA They have been the most cautious, increasing their reserves for possible bad loans by 350 percent since the first quarter of last year to $ 25 billion, while European lenders have increased provisions by 269 percent to around € 16 billion.
The full scope will become clear over the course of next week, when banks such as France’s BNP Paribas, the Dutch lender ING and Italy’s UniCredit report their earnings.
HSBC, Europe’s largest bank by assets, was the most pessimistic tone during its presentation of results, with $ 3 billion in initial provisions and warning losses could reach $ 11 billion this year.
A notable outlier is Deutsche Bank, which provisioned just € 500m in the first quarter, compared to £ 2.1bn at British rival Barclays.
While many banks have recorded their largest loan loss provisions since the financial crisis, Deutsche has posted at least seven quarters in the past decade with higher charges for credit losses.
“Given that the current economic crisis is much worse than a decade ago, I don’t understand how banks think they need fewer provisions,” said Sascha Steffen, a professor of finance at the Frankfurt School of Finance and Administration.
Deutsche is “trying to kick the can down the road” and this approach could backfire when its capital reserve might be too small to cope with if losses increase, he added.
A senior German regulator said: “Banks currently have a wide margin of discretion and each uses it differently. Some are provisioning as much as they can comfortably support, others point to the high degree of uncertainty and are trying to limit [provisions]. “
Some differences can be explained by different businesses. Deutsche, for example, has less exposure to consumer credit, which is particularly vulnerable as virus-related locks reduce discretionary spending.
Meanwhile, new, unproven international accounting standards require lenders to incur large losses earlier than in previous regimes.
Following the emergency guidelines of European regulators to adopt a long-term vision and not be too “mechanistic”, Deutsche modified its approach to the new accounting standards, known as IFRS 9. Now it uses three-year average economic forecasts to model the credit losses, compared to your previous policy of using quarterly assumptions.
As a consequence, the fall in GDP simulated in Deutsche’s risk models is much milder, and therefore fewer loans turn bad.
This is a “much more lenient accounting approach than that taken by its peers,” Citigroup analyst Andrew Coombs said in a research note. “In 2020, Deutsche supposes a decrease of the GDP of the eurozone of 6.9 percent. . .[which]he also looks optimistic. “
Kian Abouhossein, an analyst at JPMorgan, said he estimated credit losses could rise to € 3 billion by the end of the year, 50 percent more than Deutsche’s current guidance.
Deutsche Chief Financial Officer James von Moltke denied that the bank underestimated the losses. In a profit call, he argued that his risk management systems had improved, government support programs in Germany had protected the bank from the worst of consequences, and its corporate clients had held up better than retail clients in Barclays and American banks.
“Some banks have grown big on Covid provisioning, others have not,” said Stuart Graham, founder of Autonomous Research. “Even if everyone uses the same bleak GDP forecasts, then you have to decide how effective extraordinary government support measures will be to mitigate the pain.
“Regulators don’t want banks to turn off the taps to finance the real economy, which is a perfectly sensible goal,” he added.
