European banks have set aside billions to prepare for bad debts

Barclays (BCS), German Bank (comics) and Santander Bank (SAN) collectively set aside nearly $6.6 billion in the second quarter for expected loan losses resulting from the coronavirus pandemic, according to earnings reports released Wednesday.

This is on top of the large sums they set aside in the spring, bringing the total amount the three lenders have set aside this year to $14.5 billion, reflecting the difficult outlook for European borrowers as the economy collapses.

“The last six months have been among the most difficult in our history,” Santander executive president Ana Botín said in a statement.

The Spanish lender has also wrote down the value of its assets by 12.6 billion euros ($14.8 billion) due to the deteriorating outlook. Nearly half of that is associated with its UK operations, where it no longer expects to derive the same value from acquisitions of smaller lenders in the early 2000s.

Santander’s pre-tax profit fell 49% in the first half, compared to the same period a year earlier, due to a massive increase in provisions for bad debts to more than 7 billion euros. ($8.2 billion).

Last week, European leaders agreed on a $2 trillion budget and economic recovery plan. Some 750 billion euros ($880 billion) will go towards rebuilding the EU economies that have suffered the most from the coronavirus crisis. The European Commission said earlier this month that it expects EU GDP to shrink by 8.3% in 2020, with growth forecast at 5.8% next year.

Britain, meanwhile, is facing its worst recession in 300 years, with the economy on track to shrink by 14% this year, according to the Bank of England.

London-based Barclays is bracing for the worst, quadrupling its bad debt cover in the first half to £3.7bn ($4.8bn), from a year earlier, due to the anticipated impact of Covid-19. Its pre-tax profit fell 58% over the period.

The losses were offset by a 31% rise in profits at Barclays’ investment bank, which benefited from increased trading revenue in extremely volatile markets.

CEO Jes Staley has long championed the investment bank despite struggling to compete with rivals on Wall Street and criticism from activist investor Edward Bramson. “The reason we’ve been able to support the economy as broadly as we have and remain financially resilient is because of our diversified universal banking model,” Staley said in a statement.

Barclays said it had provided around £22bn ($28.5bn) in government-backed loans to UK businesses and extended payment holidays to 600,000 retail customers.

Deutsche Bank, meanwhile, is seeing the fruits of a sweeping restructuring plan launched last year. The troubled German lender posted a pre-tax profit of 364 million euros ($427 million) in the first half compared to a loss of 654 million euros ($767 million) for the same period last year.

“In a challenging environment, we grew our revenues and continued to reduce our costs, and we are on track to achieve all of our targets,” CEO Christian Sewing said in a statement.

Like Barclays, Deutsche has been buoyed by market turbulence. Investment banking revenue jumped 31% to nearly 5 billion euros ($5.9 billion) in the period, driven by trading in fixed income securities.

Deutsche Bank increased provisions for bad debts by 761 million euros ($894 million) in the second quarter, adding to the 506 million euros ($594 million) it had built up three months ago .

— Julia Horowitz contributed reporting.