Deutsche Bank provisioned just €500m in the first quarter © Alex Kraus/Bloomberg

US and European banks are on track to book more than $50bn of charges on souring loans in the first quarter, the biggest such provisions since the 2008-09 financial crisis, and an indication of the severe economic damage wrought by coronavirus.

The headline numbers mask dramatically different approaches across the industry, raising questions about how rigorous some banks are being in assessing possible future losses.

Among the biggest institutions, US banks have been the most cautious — boosting their reserves for potential bad loans by 350 per cent from the first quarter last year to $25bn — while European lenders have increased provisions by 269 per cent to about €16bn.

The full extent will become clear over the course of the coming week, when banks including France’s BNP Paribas, Dutch lender ING and Italy’s UniCredit report their earnings.

HSBC, Europe’s largest bank by assets, was the most pessimistic in tone during its results presentation, taking $3bn in initial provisions and warning losses could reach $11bn this year.

A notable outlier is Deutsche Bank, which provisioned just €500m in the first quarter, compared with £2.1bn at UK rival Barclays.

While many banks booked their highest loan loss provisions since the financial crisis, Deutsche has posted at least seven quarters in the past decade with greater loan loss charges.

“Given the current economic crisis is far worse than the one a decade ago, I do not understand how banks think they need fewer provisions,” said Sascha Steffen, professor of finance at Frankfurt School of Finance & Management. 

Bar chart of Credit provisions as % of loan book  showing Banks prepare for onslaught of bad loans

Deutsche is “trying to kick the can down the road” and this approach could backfire later on when its equity buffer might be too small to cope if losses do surge, he added.

A senior German regulator said: “Banks currently have a massive margin of discretion and each is using it differently. Some are provisioning as much as they can comfortably stomach, others point to the high degree of uncertainty and are trying to limit [provisions].”

Some differences can be explained by varying business. Deutsche, for example, has less exposure to consumer credit, which is particularly vulnerable as virus-related lockdowns slash discretionary spending.

Meanwhile, new and untested international accounting rules require lenders to take steep losses earlier than under past regimes.

Line chart of FTSE Eurofirst 300 Banks index showing European bank shares under pressure over economic outlook

Following emergency guidance from European regulators to take a long-term view and not be too “mechanistic”, Deutsche amended its approach to the new accounting rules, known as IFRS 9. It now uses three-year average economic forecasts to model loan losses, compared with its previous policy of using quarterly assumptions.

As a consequence, the drop in gross domestic product simulated in Deutsche’s risk models is much milder, and hence fewer loans turn bad.

This is a “far more lenient accounting approach than adopted by peers”, said Citigroup analyst Andrew Coombs in a research note. “In 2020, Deutsche assumes a eurozone GDP decline of 6.9 per cent . . . [which] also looks optimistic.”

Kian Abouhossein, an analyst at JPMorgan, said he estimated credit losses could rise to €3bn by the end of the year, 50 per cent higher than Deutsche’s current guidance.

Deutsche’s chief financial officer, James von Moltke, denied the bank was underestimating losses. On an earnings call, he argued that its risk management systems had improved, government support programmes in Germany had shielded the bank from the worst of the fallout and its corporate clients had held up better than retail customers at Barclays and the US banks.

“Some banks have gone big on Covid provisioning, others have not,” said Stuart Graham, founder of Autonomous Research. “Even if they all use the same bleak GDP forecasts, you then have to decide how effective the extraordinary government support measures will be in dulling the pain.

“Regulators don’t want banks to switch off the taps for financing the real economy, which is a perfectly sensible objective,” he added.

Get alerts on Banks when a new story is published

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article