More than 360 billion euros ($425 billion) of loans at Europe’s biggest banks have been subject to payment breaks or other coronavirus relief measures but the big question is whether borrowers will be able to resume payments when support ends.
At the direction of governments and regulators, lenders have granted millions of consumers and companies breathing space to help them deal with the financial fallout from the pandemic.
But determining what proportion of loans might go bad when relief measures end, and in turn the degree to which banks’ will suffer losses, is not straightforward.
Figures from the seven biggest European banks that provided data on their relief measures at the end of the second quarter show the value of outstanding loans subject to some kind of moratorium is around 15 times the size of the total provisions set aside for loan losses.
European regulators have said banks do not automatically have to set aside money to cover loans subject to payment breaks if they have a degree of confidence normal payments will resume, but that is proving hard to assess.
Thomas Verdin, Bank & Regulation Director at BM&A, an independent audit and consulting firm, noted that some clients not in financial difficulty had requested short-term relief as a precautionary measure.
“You don’t know if the volumes of loans under moratoria is a signal of financial difficulties,” he said.
Although second quarter earnings calls were dominated by questions on the impact of loan moratoria, banks said there were few signs of stress where payment holidays had already ended.
Santander (SAN.MC) said around 116 billion euros of loans had been subject to some kind of payment break. Moratoria on around a third of that volume had expired by July 15, with the vast majority of such loans still performing.
However, borrowers who opt not to extend payment holidays are those likely to be in a stronger financial position.
In Britain, initial offers of three-month payment breaks have already been extended once, with most now due to end in autumn.
Lloyds Banking Group, Britain’s biggest mortgage lender, has said it’s only in the next few months that they will get “get a clearer picture of the underlying situation”.
Italy’s biggest bank UniCredit (CRDI.MI) said that while it had made broad provision for loans subject to moratoria, it would likely not be able to make specific provisions until next year.
But as a clearer picture emerges of the economic fallout from the crisis, the pressure on banks for clearer provisioning will grow.
“The timely classification and measurement of credit risk is critical for banks to provide confidence to supervisors and their stakeholders,” the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) said a paper in May.