European bank takeover boom faces bad debt risks

A BNP Paribas logo is seen outside a bank office in Nantes, France, February 5, 2019. REUTERS/Stephane Mahe

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LONDON, April 22 (Reuters Breakingviews) – European banking investors entered 2022 expecting a new era of windfall payments. Their hopes could be dashed as the war in Ukraine has increased the chances of a recession. Big lenders, like Barclays (BARC.L) and BNP Paribas (BNPP.PA), may need to focus on replenishing buffers against defaults, which are thinner than before the pandemic, especially as governments have less leeway to support the economy.

Certainly, there are bright spots. Money market prices imply that the European Central Bank will take interest rates above zero this year, while the Bank of England has already hiked three times. This increases bank revenues. The average net interest margin of the 10 largest banks in the UK and euro zone will rise to 1.56% this year and 1.62% next, from 1.52% in 2021, according to estimates. Refinitiv analysts.

Meanwhile, the combined effects of pandemic-era payment restrictions and a rapid economic recovery have left banks with plenty of idle capital. They promised to return much of that to shareholders. Bank of America analysts estimated in February that European lenders would return almost 90 billion euros to investors in the form of dividends and share buybacks this year and another 70 billion euros in 2023, against levels of around 60 billion euros before the pandemic.

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This can now be a stretch. Rising energy prices and continued supply chain lockdowns are holding back growth: The International Monetary Fund on Tuesday lowered its forecast for euro zone GDP growth for 2022 to 2.8%, from 3, 9% in January. Rising energy bills and rising interest rates are making it harder for households and small businesses to service debt. And a recession is likely if Russian gas stops flowing into the region.

Banks have relatively thin bad debt reserves to hedge against such a scenario. The 10 largest European and UK lenders by assets collectively held 115 billion euros in provisions for credit losses at the end of 2021, or 1.7% of their combined loans. That compares to 2% in 2020 and 1.8% in 2019. Banks may need to top up those protective buffers if the economy dips, eating away at earnings. Especially since governments and central banks have less leeway to intervene with fiscal stimulus measures or rate cuts respectively. Public debt has soared over the past two years and inflation is at its highest level in decades in many major developed economies.

Banks are undoubtedly in a better position now than at the start of 2020. But hopes for a payment windfall are increasingly difficult to square with a deteriorating economy.

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(The author is a Reuters Breakingviews columnist. The views expressed are his own.)


– HSBC, UBS and Banco Santander are due to release their first quarter financial results on April 26, kicking off earnings season for Europe’s big banks.

– The STOXX Europe 600 Banks Index is down 16% from its 2022 peak on Feb. 10, compared to a 3% decline for the STOXX Europe 600 Index over the same period.

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Editing by Swaha Pattanaik and Oliver Taslic

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