Europe’s banks set aside billions more as they brace for bad debts

Three of Europe’s biggest banks have added billions more to their reserves to cover bad debts as they brace for one of the worst global recessions on record.

Barclays (BCS), Deutsche Bank (DB) and Banco Santander (SAN) collectively set aside nearly $6.6 billion in the second quarter for expected loan losses arising from the coronavirus pandemic, according to earnings reports published Wednesday.

That’s on top of hefty sums they reserved in the spring, bringing the total amount the three lenders have set aside this year to $14.5 billion, reflecting the tough outlook for Europe’s borrowers as the economy tanks.

“The past six months have been among the most challenging in our history,” Santander executive chairman Ana Botín said in a statement.

British Prime Minister, Boris Johnson leaves Downing Street to attend Prime Ministers Questions at the Houses of Parliament on June 3, 2020 in London, England. Dominic Cummings, chief advisor to the prime minister, came under scrutiny after allegedly breaching lockdown rules and subsequently having to issue a statement to the British public from the garden of Downing Street.

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The Spanish lender alsowrote down the value of its assets by €12.6 billion ($14.8 billion) because of the deteriorating outlook. Nearly half of that amount is associated with its business in the United Kingdom, where it no longer expects to derive the same value from acquisitions of smaller lenders in the early 2000s.

Santander’s profit before tax tumbled 49% in the first half, compared with the same period a year earlier, caused by a massive increase in bad debt provisions to over €7 billion($8.2 billion).

European leaders last week agreed on a $2 trillion budget and economic recovery package. Some €750 billion ($880 billion) will go toward rebuilding 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 8.3% in 2020, with growth next year forecast at 5.8%.

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

Spain's Prime Minister Pedro Sanchez (L), French President Emmanuel Macron (C) and German Chancellor Angela Merkel (R) look into documents during an EU summit in Brussels on July 20, 2020, as the leaders of the European Union hold their first face-to-face summit over a post-virus economic rescue plan. (Photo by JOHN THYS / POOL / AFP) (Photo by JOHN THYS/POOL/AFP via Getty Images)

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London-based Barclays is preparing for the worst, effecting a four-fold increase to its bad debt cover in the first half to ￡3.7 billion ($4.8 billion), compared with a year earlier, due to the anticipated impact of Covid-19. Its profit before tax fell 58% in the period.

Losses were offset by a 31% increase in profit at Barclays’ investment bank, which enjoyed a boost to trading income from extremely volatile markets.

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

Barclays said it has delivered around ￡22 billion ($28.5 billion) of government-backed loans to UK businesses and extended payment holidays to 600,000 retail customers.

Deutsche Bank, meanwhile, is seeing the payoff of a radical restructuring plan launched last year. The troubled German lender posted a first-half profit before tax of €364 million ($427 million) versus a loss of €654 million ($767 million) for the same period last year.

“In a challenging environment we grew revenues and continued to reduce costs, and we’re fully on track to meet all our targets,” CEO Christian Sewing said in a statement.

Like Barclays, Deutsche got a boost from market turmoil. Investment banking revenues surged 31% to nearly €5 billion ($5.9 billion) in the period, driven by fixed income trading.

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

— Julia Horowitz contributed reporting.