European banks' loan loss provisions jump 18% YOY amid tariff risks

Europe's biggest banks reported an 18% year-over-year increase in provisions for loan losses during the first quarter, amid warnings that uncertainty around international trade policy could hurt asset quality.

Aggregate provisions among 45 of the region's largest lenders rose to €11.48 billion from €9.72 billion in the first quarter of 2024 and €8.45 billion a year earlier.

On a quarterly basis, provisions fell 5.8% to €11.48 billion from €12.19 billion in the fourth quarter of 2024.

While euro area banks continue to display robust asset quality, heightened trade tensions may cause nonperforming loans (NPLs) and provisioning costs to increase, the European Central Bank said in its May 13 Financial Stability Review. Banks with higher exposure to sectors relying on extra-EU trade could be particularly affected, the regulator noted.

Market uncertainty has also raised concerns about the way the region's lenders provision for emerging risks. Extraordinary events, such as the hefty US tariff hike in early April and the COVID-19 pandemic in 2020, have exposed the limitations of standard models used to estimate potential credit losses, resulting in large differences on the banks' interpretation of risk and their provisioning.

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Seventeen of the 45 banks reported a quarterly increase in their problem loan ratios, and 18 reported a year-over-year increase.

Four of the five UK-headquartered banks in the sample posted higher problem loan ratios, with Barclays PLC registering the sharpest increase. All are projected to hike provisions this year, Visible Alpha data shows.

Barclays set a £74 million provision for risks linked to US macroeconomic uncertainty, although it noted that its portfolios had not yet shown signs of deterioration, with delinquencies broadly stable in the UK and in the US.

Lloyds Banking Group PLC's first-quarter provisions jumped to £309 million from £57 million a year prior, of which £100 million was attributed to tariff risks.

"To be very clear, this is not addressing any impacts that we're seeing today within our book...This is about getting ahead of what might develop and making sure that we are suitably provisioned," Lloyds CFO William Chalmers said on the bank's earnings call.

France's Groupe BPCE and Italy's UniCredit SpA recorded the largest quarterly increases in their problem loan ratios. UniCredit would require its takeover target Banco BPM SpA to set aside about €800 million in further loan loss provisions to align with its own asset quality should a deal materialize, CEO Andrea Orcel said during the bank's May 12 earnings call.

Mediobanca Banca di Credito Finanziario SpA achieved the biggest quarterly reduction at 48 bps. It is the subject of a takeover bid from Italian peer Banca Monte dei Paschi di Siena SpA, which had the highest problem loan ratio in the sample at 4.01%.

SEB booked 663 million Swedish kronor in loan loss provisions in the first quarter, up from 73 million a year ago, mainly due to select corporate clients in certain sectors, President and CEO Johan Torgeby said on the bank's earnings call. Stage 2 exposures rose at SEB following an update to its retail expected credit loss models, according to the bank.

While Sweden is more exposed to tariffs than other Nordic countries, SEB and its two smaller peers in the sample, Swedbank AB (publ) and Svenska Handelsbanken AB (publ), recorded stable bad loan ratios in the first quarter.