World’s leading banks set aside US$66 billion to handle bad loans

The world’s biggest banks have set aside US$66 billion so far this quarter for an expected increase in bad loans as lockdowns to combat the spread of the coronavirus raise the spectre of largescale corporate defaults.

U.S. banks were among the most aggressive, with six of the biggest earmarking US$26 billion. Europe lagged behind, with six of the largest banks that have reported results so far putting away US$11.5 billion, led by U.K. firms and Spain’s Banco Santander SA.

The figures are an early indication of the damage the crisis is expected to inflict on lenders across the globe, but there are lots of variables that can make them difficult to compare. Banks in the U.S., for instance, have been more profitable than European lenders and can afford to take a significant hit upfront. Some of them are also more exposed in areas such as credit card debt and lending to oil and gas companies.

In Europe, HSBC Holdings PLC and Barclays PLC were among the most aggressive, with HSBC saying credit losses could swell to US$11 billion this year. Eurozone lenders heeded a call from the European Central Bank to avoid a sharp increase. The ECB has encouraged lenders to be flexible in applying accounting standards, recognizing both their relative weakness and their systemic importance in a region where companies still depend largely on bank lending rather than capital markets for funding.

Several European banks pointed out that they had reduced lending to oil and gas producers in recent years. Others like UBS Group AG, which took the lowest provisions among the six European banks, touted the “high quality” of its borrowers — many of them millionaires with assets to back their loans, even if the value of those assets has fallen.

Governments have also made life easier for European banks with wide-ranging guarantees and payment stays extended to corporate and consumer loans. Deutsche Bank AG, which took a relatively small hit, said it was comfortable doing so because many of its corporate clients are small and medium-sized German businesses that benefit from one of the world’s most extensive aid packages.

Despite the relief, Europe’s top investment banks are still on course for the highest level of loan loss provisions since the aftermath of the financial crisis, with more to come over the next quarters. Deutsche Bank said it expects provisions to peak in the second quarter. But as the crisis ripples through the economy, there’s a high degree of uncertainty, particularly for banks that have taken provisions so far.

“We might see a further reserve build in the coming quarters,” said Credit Suisse Group AG chief executive Thomas Gottstein.

In China, where the virus hit first, regulators have also allowed banks to take a more lenient approach on how they classify bad debt. The country banks had already been grappling with a growing pile of bad loans for several years and saw a slight increase in their share of overall credit in March. That increase was limited by lenders agreeing to let small businesses defer payments and roll over debt.