Big European banks bolster provisions amid weaker economic growth forecasts

Europe's largest banks bulked up provisions in the third quarter amid expectations of weaker economic growth in the region.

Fifteen of the 25 largest European banks by assets increased loan loss provisions quarter over quarter, or booked provisions versus writebacks in the previous three months.

Spain-headquartered Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA booked the largest provisions in the sample at €3.21 billion and €1.25 billion, respectively. Santander's provisions up from €2.94 billion in the second quarter and from €3.07 billion a year before.

French banks BNP Paribas SA, Crédit Agricole SA and Société Générale SA were among the 10 banks with the highest third-quarter provisions, along with UK-headquartered HSBC Holdings PLC, NatWest Group PLC and Barclays PLC, Spain's CaixaBank SA and Switzerland's UBS Group AG. Of the 10, only Crédit Agricole and UBS decreased their provisions from the previous quarter.

Tough economy

Banks in Western Europe are expected to book higher problem loans in the face of higher costs, a higher-for-longer interest rate environment and sluggish economic growth, analysts at S&P Global Ratings said in a recent report.

The ECB in September cut its EU economic growth forecast to 0.8% this year from a previous forecast of 1%. In Germany, the Bundesbank projected that economic output will likely shrink again slightly in the last three months of 2023. The economy "is set to recover only arduously," the regulator said in its economic report for November.

Eurozone banks have been tightening credit standards, more so in the third quarter, across all loan categories, according to the European Central Bank's latest bank lending survey.

– Access the Peer Analysis template on S&P Capital IQ Pro. – Access asset quality detail, including loan loss provisions data, for Santander and BBVA on S&P Capital IQ Pro.

Despite the provisioning buildup, European banks still reported solid profitability in the third quarter. Eighteen of 25 sampled banks posted year-over-year net income increases. UBS was the lone bank to book a quarterly loss, principally due to expenses related to its integration of Credit Suisse Group AG.

HSBC, the largest bank by assets in the sample, reported the largest income, at €5.56 billion, more than doubling year over year from €2.45 billion. Santander and BNP Paribas followed with €2.90 billion and €2.66 billion, respectively.

Net interest income

Higher income from lending operations bolstered banks' profits, with all but three of the 25 sampled banks reporting higher quarterly net interest income (NII). NII is the difference between interest earned on loans and that paid out on deposits.

Santander raked in the most, at €11.31 billion, followed by Credit Agricole with €9.25 billion. Higher central bank rates have helped. Starting in July 2022, the ECB made 10 consecutive rate hikes totaling 4.5 percentage points, before it paused in late October.

How banks' NII will evolve in the coming quarters depends to some extent on their location.

The ECB has signaled that it will likely maintain its key rates at their current level for a prolonged period, and Spanish banks such as Santander and BBVA expect NII to keep growing until at least the end of the first half of 2024, driven by higher interest rates and lower-than-expected deposit costs. NII growth for their Nordic peers, meanwhile, is expected to taper off earlier in the fourth quarter.

Norway-based DNB Bank ASA, Denmark's Danske Bank A/S and Swedish banks Skandinaviska Enskilda Banken AB (publ) and Svenska Handelsbanken AB (publ) had among the lowest NII in the sample.

Banks in Russia and Ukraine, where government ownership means they are subject to different market dynamics than those in Western Europe, were excluded from this analysis.