Pandemic payment breaks on European loans totalling billions of euros threaten to undermine efforts by the region’s banks to put the coronavirus crisis behind them.

Some of the millions of borrowers who were given repayment holidays by banks and governments across Europe shortly after the outbreak of the pandemic still need relief as a second wave of lockdowns squeezes the economy and puts people out of work.

But the longer their loan repayments are kept on ice, the bigger the potential problem for banks as debts stack up, making them more difficult to tackle.

The European Central Bank’s chief supervisor Andrea Enria has warned of a “huge wave” of unpaid loans that could top €1.4 trillion and has cautioned against postponing writing them off, warning that waiting for loan moratoria to expire could see many borrowers “unravel at once”.

Although the volume of loans on pause fell sharply over the summer, a Reuters survey and analysis of the latest data available shows that loans totalling about €320 billion were still on a payment holiday at 10 of Europe’s biggest banks.

Personal debt in Europe, whether for houses, white goods or cars, is at a record high, European Union data shows. Although some countries cut back in the past decade, consumers in Britain, France and Germany borrowed roughly one fifth more.

So when payment holidays became widespread during the first wave of coronavirus lockdowns in Europe, lenders prepared for losses, with financial results showing that the 10 have set aside some 45 billion euros to cover the cost of unpaid loans.

An analysis of loans still on a payment break at ten of Europe’s largest banks, Santander SAN.MC, HSBC HSBA.L, Barclays BARC.L, Societe Generale SOGN.PA, BNP Paribas BNPP.PA, ING INGA.AS, Intesa ISP.MI, UniCredit CRDI.MI, Deutsche Bank DBKGn.DE and Credit Agricole CAGR.PA, show many thousands are still delaying resuming monthly repayments.

For banks looking to avoid a return to the dark days of the debt crisis a decade ago, there is a delicate balancing act between meeting government requests to go easy on borrowers and not putting their loan books in jeopardy.

Calculating default risk is complicated and banks take many factors into consideration such as the type of loan, the circumstances of the borrower and the wider economy.

Spain’s Santander, which has €39 billion of loans on hold, made 9.6 billion euros of provisions for unpaid debt, while Italy’s Intesa, with €48 billion of loans on moratoria, set aside just 2.7 billion euros this year.

A spokesman for Intesa said customers that took payment holidays were resilient and their exposure to tourism, hard hit by the crisis, was low. Santander declined to comment.

Central banks in Germany, which told banks to prepare for the “worst case” and Portugal, which cautioned of the risks of winding down economic support measures, are worried that if personal debt problems spiral it could suck in banks too.

 “Some banks have more than 20 per cent of their loans on payment holiday. When will gravity kick in? At some point, you have to return to normal business,” Jerome Legras of Axiom Alternative Investments said.

In Italy, payment breaks rose to roughly 10 per cent of mortgage loans at the height of the pandemic, while in Britain it reached more than 15 per cent, calculations by the European Datawarehouse, which collects the data for investors, show.

Payment holidays in Portugal reached 12 per cent, it estimated.

Since then, the majority of borrowers have resumed paying.

But problems linger.

“There is a significant amount of distressed debt throughout Europe,” Ed Sibley, Deputy Governor of the Irish Central Bank said. “And that distress will increase because of COVID-19.”

A recent study by Ireland’s central bank found that although the number of payment breaks had fallen by more than a quarter since June, 9 per cent of Irish loans remain on hold.

It found that hotels and restaurants, among the worst hit by the pandemic, were the most likely to still be on a break.

“For now, job protection measures are in place. But this will start coming to an end,” said Ernest Urtasun, a Spanish lawmaker in the European Parliament. “The number of distressed borrowers will explode in the coming months.”

Banks, however, are hopeful government support, which is being extended around Europe, will help.“Withdrawing support to companies and the economy ahead of time is the time bomb,” said Miguel Maya, CEO of Portugal’s Millenium bcp. “We have to give the economy time to breathe.”

Original Story: Cyprus Mail | Reuters News
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The coronavirus pandemic will push residential mortgage default rates up and home prices down in Spain and Portugal, Fitch Ratings says in a new report. Payment holidays have cushioned mortgage performance from the pandemic’s impact, but job losses mean some borrowers will face payment shocks as their payment holidays come to an end.

“We have updated our key analytical assumptions for Iberian mortgage portfolios to reflect the continuing credit effects of the pandemic. Under our ‘Bsf’ rating scenario reflecting our base-case expectation plus a small cushion, the lifetime default rate of a representative mortgage pool has increased to 9.7% in Portugal and 7.8% in Spain, from 9% and 7% respectively”,  says the agency in a note.

Banking system non-performing loan (NPL) ratios have not yet risen from pre-pandemic levels, as payment holidays suppress and delay mortgage defaults. But while payment holidays will have helped some borrowers avoid default, the roll-rate to default for payment holiday loans will be mostly influenced by underlying employment dynamics. Historical data from legacy Spanish portfolios indicates that default rates on payment holiday loans could be about 20% higher than on standard loans.

Borrower support measures may have also delayed evidence of house price drops, amid very low interest rates and expansionary ECB monetary policy. Nevertheless, Fitch Ratings forecasts Spanish nominal house prices to decline approximately by 10% in 2020-2021, and had increased its “Bsf’ rating scenario current-to-trough house price decline (HPD) assumption to 24% from 17%, “mainly because of weakening affordability and fragile consumer confidence due to the pandemic’s impact on GDP and employment.

Unlike Spain, Portugal saw mortgage lending volumes grow in the first half of 2020, supporting nominal price growth in the high single digits. However, Fitch analysts believe lower domestic demand, and a more cautious approach by lenders and also by cash and foreign buyers (who together have accounted for more than half of housing market activity in recent years), will see prices fall by around 2% over the next one-two years. Our current-to-trough HPD assumption for Portugal is unchanged at 26%.

Original Story: Fitch |  Fitch Ratings
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The number of mortgages taken out by Spaniards fell in March by 14.6% year-on-year, the government’s statistics body said, reflecting the hit from the coronavirus outbreak.

March’s 26,382 mortgages also represented a 26.8% decrease from February, the National Statistics Institute said.

One of the worst-hit nations in the world by the COVID-19 disease, Spain began a strict lockdown on March 14.

Mortgages in April, the first full month under lockdown, are likely to fall even more starkly. Analysts expect the near standstill in Spain’s economy to have a direct impact on banks’ mortgage books, which account for 40% of their credit portfolios or around €500 bn.

State-owned Bankia, one of the most-exposed lenders to mortgage loans, said during first quarter results new mortgage lending had fallen around 60% in April against March, though it expected a post-lockdown recovery.

Lockdown measures prevented individuals from conducting property visits, taking out mortgages, and relying on public notaries – who were only permitted to practise in emergency cases.

To mitigate the impact of the epidemic, which led to hundreds of thousands of job losses, the government approved mortgage holidays in March.

Spain’s economy relies heavily on both tourism and real estate activity, making it particularly vulnerable to the pandemic which has killed 27,117 people.

Property prices, however, held steady despite the economic ravages, with Spain’s largest property portal Idealista reporting a 0.5% rise in home prices in April.

Original Story: Reuters| Clara-Laeila Laudette
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Spanish banks borrowed €167.5 bn in April from the European Central Bank, a 17% increase from March to the highest level in 16 months amid the coronavirus pandemic, Bank of Spain data showed on Thursday.

The €24.5 bn monthly increase was also the highest since March of 2012, near the height of the financial crisis, when it jumped by more than €146.5 bn.

In August 2012, Spanish banks had taken a record €411 bn from the ECB, when the country’s financial turmoil reached a peak and weak lenders were granted a €41.3 bn aid package from Europe that summer.

Banks in the euro zone are expected to apply for cheaper long-term funding lines to help mitigate the impact from the coronavirus outbreak.

With financial markets in meltdown and borrowing costs soaring for the euro zone’s weaker members, the European Central Bank said in April it would make loans to banks even cheaper.

With the euro zone’s economy deep in recession, banks are bracing for a new wave of non-payments from clients hit by the coronavirus pandemic and subsequent economic shutdown.

In its latest move to support the sector, the ECB said it would now pay banks at least 0.50% and up to 1% if they tap its three-year loan auctions.

Under the new ECB’s schemes, they will earn 0.50% for one year from June by simply tapping the targeted longer-term refinancing operations (TLTRO) auction and 1% if they pass on the cash to households or companies.

To prevent any liquidity crunch the ECB also announced seven new Pandemic Emergency Longer-Term Refinancing Operations (PELTRO) at which banks will get as much credit as they want and earn 25 basis points.

This may prove enticing in particular for lenders in peripheral countries such as Spain that can use the cash to buy higher-yielding domestic government bonds and pocket the difference in interest rates.

Original Story: Reuters|Jesus Aguado
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Spanish companies are better prepared to face the disruption from the coronavirus pandemic than when the global financial crisis hit, although some vulnerabilities persist, the Bank of Spain governor said.

Spain’s central bank said in its latest financial stability report that risks to global financial stability had increased but measures taken at national and European should help mitigate them.

«Spanish households and non-financial companies are facing this situation with a significantly more favourable financial position than before the global financial crisis,» Bank of Spain governor Pablo Hernandez de Cos said in a separate statement commenting on the central bank’s report.

De Cos, who is also a member of the European Central Bank governing council, said the better relative positive position of Spanish companies was mainly a result of the substantial reduction of their debt in recent years, which is now below the European average.

However, the Bank of Spain said the contraction of the economy in the second quarter would be significantly higher than in the previous quarter, when it showed a quarterly record decrease of 5.2%.

The Bank of Spain also said that the COVID-19 pandemic had lead to an increase of the cost of risk – or the cost of insuring a loan – in banks’ exposures to companies. The challenges for lenders were significant due to the magnitude of the shock in the short-term.

Against this backdrop, the Bank of Spain said that despite the significant reduction in bad loans since 2014, the non-performing loans ratio was still above pre-crisis levels and would experience an increase thus further eroding the bank’s already battered profitability ratios.

Original Story: Reuters| Jesus Aguado, Emma Pinedo
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European banks are expected to duffer a hit of up €380 billion to their capital due to the economic disruption from coronavirus pandemic, but most should be able to absorb the losses, according to the European Banking Authority (EBA).

EU’s banking watchdog said it had carried out a “sensitivity analysis” based on the results of its 2018 stress test of the sector to determine the likely increase in nonperforming loans (NPL) and increased riskiness of their loan books because of the virus emergency. 

The share prices of many European banks have fallen almost 50% this year as investors have anticipated how the economic and financial turmoil caused by the pandemic will hurt their weak profitability and may force some to raise extra capital. 

However, “The starting position of the banks [was] very good at the end of last year [and] the measures put in place since the last crisis have held up”, José Manuel Campa, chairman of the EBA, told the Financial Times.

“As a result of all that, the buffers are large and should be sufficient in the short term so we are not worried about [the banks’] short-term ability to lend to the economy and in the long term to have sufficient buffers to absorb the eventual losses,” he added. 

Assuming an increase of between €169 bn and €291 bn in bad loans at the biggest eurozone banks, the EBA said the hit to their capital would be accentuated by an overall increase in the likelihood of borrowers to default. 

The watchdog’s estimate for the capital likely to be wiped out by the crisis ranged from 2.3 to 3.8 % of banks’ total risk-weighted assets — the main way they measure how much capital they need. Every percentage point of risk-weighted assets is worth about €100bn of capital. 

At the end of 2019, banks had capital equivalent to nearly 15 per cent of their risk-weighted assets — roughly 3% above the level required by regulators. Several measures introduced by regulators in response to the virus have provided banks with capital relief equivalent to about 2% of risk-weighted assets. 

The FT reported this year that European Central Bank officials have held high-level talks with counterparts in Brussels about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets — but the plan has faced opposition from some EU governments. 

The EBA, which postponed a planned stress test of the sector until 2021 because of the virus, said: “As the crisis develops, banks are likely to face growing non-performing loan volumes, which can reach levels similar to those recorded in the aftermath of the sovereign debt crisis. 

“Capital levels should help banks withstand the impact of Covid-19,” it said, adding: “There could be weaker banks (those with pre-crisis problems or heavily exposed to the sectors more affected by crisis) facing more severe challenges.” 

Total NPLs in the biggest 121 eurozone banks had more than halved in six years to €506bn, or 3.2% of their loan books, by the end of last year. But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6%. 

The watchdog said that 18 per cent of European bank loans were to companies in sectors expected to be hardest hit by the disease, including hotels, restaurants, manufacturing, electricity and transport and storage.

However, it said there were a number of caveats to its estimates, including the government guarantees and moratoria being offered on bank loans in various countries, which could shield lenders’ balance sheets from the impact of the crisis. 

It warned that its analysis was only for credit risk, and there could be “additional losses from market, counterparty and operational risk”. It added it had not taken account of the rise in bank lending since the start of this year, as many companies drew down credit facilities.

Original Story: Financial Times | Martin Arnold and Stephen Morris 
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Bankia, Spain’s fourth-largest bank by assets, reported a 54% drop in first-quarter net profit hut by higher provisions and lower net interest income. The bank set aside a provision of €125 million to protect its balance sheet and support its customers against the fallout from the COVID-19 disease.

In the January to March quarter, Bankia reported a net profit of €94 million in the January to March quarter.

Bankia, like rival Santander SAN.MC and others, has been taking steps to counter risk as the global economy reels due to the coronavirus crisis.

Like many other European banks, Spanish lenders are also struggling to increase earnings on lending due to low interest rates.

Bankia’s net interest income, or earnings on loans minus deposit costs, fell 8.7% to €458 million. Analysts had forecast it at €473 million.

At the end of March, Bankia had a core tier-1 capital ratio – the strictest measure of solvency – of 12.95% versus 13.02% at end-December, while its non-performing loan ratio stood at 4.9%, down from 5%.

Original Story: Nasdaq|Jesus Aguado
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