Banks emerge as part of solution to Covid-19 economic crisis

The operating environment for European banks will be challenging, but resolution and senior debt bail-in are extremely unlikely.

Banks will have to be a key piece of the puzzle as authorities seek to minimise long-term economic loss. So far, only a few banks have issued explicit profit warnings as a direct consequence of the economic slowdown.

“We expect more to come in coming months, potentially ahead of the next reporting season which starts mid-April,” said Marco Troiano, deputy head of financial institutions at Scope Ratings and author of a report, out today, on the impact of banks of the coronavirus crisis.

Troiano believes the policy reaction to the crisis has been strong as far as the financial system is concerned, and it may get stronger over time as the extent of the economic damage becomes evident. “But we do expect private and public sector borrowers eventually to come under pressure due to their elevated debt loads,” he warns.

Temporary cash flow relief may delay the emergence of credit losses but more marginal borrowers will struggle to recover from months of missed income.

“This will eventually result in deteriorating loan quality for European banks, unless their most vulnerable clients are supported by government grants and social security measures,” Troiano continued.

The rapidly deteriorating operating environment will translate into lower revenues from falling volumes across business lines that will at least initially more than offset potentially rising margins. Combined with higher provisions, this will hit profits and possibly capital.