Europe's big banks hike loan loss provisions amid waning economic prospects

Europe's biggest banks increased provisions for bad loans in the final three months of 2023 in anticipation of a potentially weaker economic development in the region.

Fourteen of the 25 largest banks by assets sampled by S&P Global Market Intelligence booked quarter-over-quarter increases in loan loss provisions. On a yearly basis, eight of the sampled banks ramped up provisions.

Spain-based Banco Santander SA earmarked the highest provisions at €3.46 billion, up from €3.21 billion in the previous quarter. This was followed by the €1.23 billion provision taken by fellow Spanish bank Banco Bilbao Vizcaya Argentaria SA. CaixaBank SA, the largest domestic bank in the country, increased provisions to €615 million from €282 million.

The European Commission in February cut its 2024 growth outlook to 0.9% in the EU and 0.8% in the euro area. Economic activity broadly stagnated in 2023, and the EU economy entered 2024 on a "weaker footing than previously expected," the Commission said.

French banks Groupe BPCE, Société Générale SA and Crédit Agricole SA recorded higher provisions, as did Italy-based Intesa Sanpaolo SpA, UniCredit SpA and Germany's two largest banks, Deutsche Bank AG and Commerzbank AG.

The French central bank also recently cut its 2024 growth projection for the country to 0.8% from 0.9%.

Commercial real estate risks

Aside from weaker-than-desired economic prospects, banks' exposure to ailing sectors, particularly commercial real estate (CRE), could also have driven the increase in provisions. Luis de Guindos, vice president of the European Central Bank, recently said the regulator was "very carefully" looking at the eurozone's CRE market, which he said was "one of the main risks for financial stability at present."

German banks, whose CRE exposures, both foreign and domestic, are higher than most other European sectors, could book higher credit losses in the future, Fitch Ratings said in a February commentary.

Frankfurt-based Deutsche Bank increased provisions due to the CRE market in the US. Although there has been no deterioration in the bank's CRE portfolio, there have also been no signs of improvement, CEO Christian Sewing recently said at a conference. Deutsche Bank expects CRE provisions in line with the "elevated" levels in 2023, Sewing said.

BNP Paribas SA, Credit Agricole, ING Groep NV and UniCredit also hold significant outstanding CRE loans, Reuters recently reported, citing data from the European Banking Authority.

Soaring profits nonetheless

Even as provisions rose, most of the sampled banks reported year-over-year increases in net income. Net interest income bolstered earnings, particularly at banks with significant retail businesses.

Thirteen of the 25 banks grew fourth-quarter 2023 net income, with Santander reporting the biggest result at €2.93 billion. UniCredit earned €2.81 billion in what was a record year for the Italian lender.

European banks' fourth-quarter earnings were strong and their guidance was upbeat, BofA Global Research analysts said in a note in early March. Although revenue growth is expected to be low, with the interest rate environment normalizing, revenues are still expected to keep increasing, the analysts said.

The stronger profits also allowed banks to bolster their capital levels and make record shareholder payouts. European banks are expected to distribute €175 billion in the next 15 months, BofA Global Research said, noting that these payouts will be taken from earnings and not capital.

Thirteen of the sampled banks held common equity Tier 1 (CET 1) ratios higher as of Dec. 31, 2023, versus three months before, according to Market Intelligence data. All sampled banks held double-digit CET1 ratios.