Big European banks up Q2 provisions as economic, geopolitical risks persist

European lenders set aside more capital for loan losses in the second quarter as the asset quality pressure from an economic slowdown and geopolitical issues persisted.

The aggregate quarterly loan loss provisions of the region's largest banks amounted to €10.94 billion, according to S&P Global Market Intelligence data. This represents a 0.7% increase quarter over quarter and about 12.2% year over year.

Rising geopolitical risks and the impact of higher US tariffs on the global economy should continue to weigh on European banks' balance sheets and may result in a mild deterioration in their asset quality, Scope Ratings wrote in an Aug. 14 note.

Market Intelligence's sample included European banks with assets of more than €100 billion at the end of June, except those in Russia and Ukraine.

Türkiye Cumhuriyeti Ziraat Bankasi AS's problem loan ratio increased by 18 basis points quarter over quarter, the highest in the sample. Ziraat Bank is the largest lender by assets in Turkey, which has seen some domestic political tensions since March. The country's central bank has resumed monetary easing with a surprise 300-basis-point cut in July to spur economic growth.

Germany's top two listed lenders, Deutsche Bank AG and Commerzbank AG, booked increases of 16 bps and 10 bps, respectively. German Chancellor Friedrich Merz has said the economy faces a "structural crisis" due to high energy costs and the effects of high US tariffs. The country's banks also carry significant exposures to the real estate sector, particularly Deutsche Bank, which is substantially exposed to US commercial real estate.

Deutsche Bank CFO James von Moltke said the bank's CRE provisions in the quarter remained elevated, noting that there were valuation pressures on nonperforming exposures, particularly in the US West Coast.

Commerzbank set aside an additional €270 million in the quarter to cover potential losses tied to economic factors including US tariffs, climate change and sector-specific risks.

Italy-based UniCredit SpA and Banca Monte dei Paschi di Siena SpA posted some of the largest quarterly declines in problem loan ratios among the banks in the sample. However, Monte dei Paschi remained the bank with the highest ratio at 3.74% at the end of June.

US tariffs continue to pose a risk to the asset quality of the Italian banking sector due to the country's reliance on exports, Morningstar DBRS said in a commentary. Yet, banks' income diversification strategies, higher liquidity and improved capital buffers should help absorb credit losses from these risks.

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For stage 2 loans, or underperforming loans at increased risk of turning sour, HSBC Holdings PLC recorded the sharpest quarterly increase in the sample, followed by Belgium's KBC Group NV and Austria's Raiffeisen Bank International AG.

HSBC said in its interim report that the increase in stage 2 loans was mainly caused by updates to its models in calculating the probability of default. As a result, some performing loans got shifted to the stage 2 bucket, although they are mainly of "good" and "satisfactory quality." The bank expects its 2025 expected credit losses, as a percentage of average gross loans, to hit about 40 bps and settle at the upper end of its medium-term target range of 30-40 bps.