European banks to incur loan losses of around $458 bn due to Covid-19

Loans to SMEs and consumer loans are more at risk

European banks are expected to see a sharp rise in loan losses in the next three years due to the coronavirus pandemic, according to media reports.

Loans to small and medium-sized enterprises (SMEs) and consumer loans grew significantly by more than 20 percent between the end-2014 and June 2019. However, they are more at risk now, according to a report by credit rating agency Moody’s.

The coronavirus economic downturn is expected to drive a deterioration in loan quality, with the percentage of problem loans estimated to rise by between 100-300 basis points by 2022 for most European banks, Moody’s added.

The agency further added that government stimulus will not completely offset the financial and economic damage inflicted by the pandemic and the full extent of loan quality deterioration will be revealed only once these measures are unwound.

Another report by Oliver Wyman says that a second lockdown in the region could lead to a significant rise in loan losses for European banks.

Christian Edelmann, Co-Head of EMEA financial services at Oliver Wyman told the media, “The pandemic is unlikely to cripple the European banking sector, however, many banks will be pushed into a ‘limbo state’, with very weak returns.”

“Ambitious restructuring efforts will be needed, but to succeed they will need engagement and support from policymakers and regulators. That includes agreeing on transformation plans with short-term capital impacts, encouraging consolidation to happen more quickly and accelerating single banking market efforts,” Edelmann added.