European Banks Could Suffer COVID-19 Loan Losses Worth $947 billion If Push Comes to Shove

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Oliver Wyman, a top consultancy firm, predicts that banks in Europe will likely face loan losses to the tune of £800 billion ($947 billion) in the coming three years.

Even if the continent doesn’t suffer a 2nd wave of Coronavirus, a steep increase in unsecured credit losses may still cause losses worth around 400 billion euros ($473 billion), the consultancy said.

“Coronavirus will not likely trouble Europe’s banking sector, but business will be slow in several banking firms, with meager returns,” says one of the executives at Oliver Wyman.

Europe’s banking system is yet to feel the full impact of the Coronavirus. The crisis remains a bone of contention and will cause severe consequences for banks in Europe.

Oliver Wyman predicts that European banks may face possible loan losses— non-performing loans that may never be recovered — to the tune of £800 billion ($947 billion) if push comes to shove.

But in the face of such a large figure, the consultancy said banks can still “manage” the looming credit losses as the total would fall below the 40 percent recorded after the economic recession in the 2012-2014 European crisis.

In a fair situation, however, the institutions can prepare for debt losses of about £400 billion ($473 billion), which is 2.5X the rates seen in the past three years— when losses were way low.

But a worst-case scenario will see the non-performing loan (NPL) ratio jump to 10 percent and will have a significant impact on bank profits.

The current pandemic has affected the retail and service offerings in many European banks, evident by the Q2 performance.

Though Barclays’ net jumped 66 percent, the bank still reserves an entire £3.7bn in preparation for potential loan losses in Q2. Swiss bank reserved $4.7 billion while Deutsche Bank’s net income stood below analyst predictions, and Credit Suisse restructured much of its business offerings.

Still, David Gillespie, CEO of UK & Ireland’s branch of Oliver Wyman, feels European banks are still stable on a global front, but stresses the importance of managing credit losses and cutting costs.

“Banks must heap on their cost-saving strategies and strategically cover any debt losses, but the sector need not restructure its entire offerings, as in the worldwide financial situation,” he explains.

Final Words

Many economies worldwide hang on a thread as banking sectors rely on COVID-19 government reliefs to stay afloat. Hopefully, we won’t suffer another phase of Coronavirus as that would mean massive losses for the banking sector.