Europe’s biggest banks are set to unveil yet another huge round of loan loss provisions, as they take stock of the damage caused by Covid-19 around the world.

The biggest UK, Swiss and eurozone lenders are expected to fund at least 23 billion euros for the second quarter as they report profits in the coming days, Citigroup analysts say. This is in addition to the 25 billion euros in charges the same group took against potential defaults in the first three months of the year.

When added to the $ 61 billion already booked by the five largest U.S. banks in the first six months, the combined figure of the largest Western lenders could reach $ 117 billion. It would be the highest net addition to reserves since the first half of 2009, in the aftermath of the Lehman Brothers collapse, according to Citi.

Few economists foresee rapid “V” recoveries and more difficulties are expected when government support programs end in the fall. Oliver Wyman, the consulting firm, forecasts up to € 800 billion in loan losses for European banks over the next three years if there is a second wave of infections.

“This is going to be another tough one – several banks have signaled this could be the worst quarter of the year,” said Jon Peace, analyst at Credit Suisse. He noted that under the new accounting rules banks are required to ‘upstream’ their provisions for probable losses, but added that at the end of the first quarter they were working on GDP growth assumptions. and jobs “that weren’t as dark as they are today.”

UBS, the first of major European financial institutions to report last week, job a 43% increase in profits for its investment banking branch, but also took an additional $ 272 million in loan loss charges. That brought its total for the first half of the year to $ 540 million, 16 times the same period in 2019.

“The first quarter was about whether you are resilient and, for some, able to survive,” Sergio Ermotti, managing director of UBS, told the FT. “The second trimester will be about whether you can adapt. We have already entered the “lessons learned” phase of the coronavirus. “

The European banking sector, still grappling with problems inherited from the 2008-09 financial crisis, was sanctioned on the stock market. Shares of European banks have fallen 31% on average this year, compared to a 10% drop in the benchmark Stoxx 600.

On average, banks trade at less than 40 percent of the book value of their net assets. Barclays (22 billion euros), Deutsche Bank (17 billion euros) and the Italian UniCredit (20 billion euros) have a combined market capitalization less than Zoom, the $ 74 billion (€ 64 billion) video conferencing company that flourished during the pandemic.

“It’s a universal consensus that given the headwinds, investing in banks is as dumb a business as investing in oil majors,” said Richard Buxton, UK Alpha Strategy Manager at Jupiter Asset Management. “It’s unlikely that anything revealing will emerge from this reporting season to change that.”

“The economic downturn clearly means a sharp increase in bad debts,” he added. However, “I am extremely confident that whatever damage to [profit and loss accounts] of the crisis, this does not mean that they have to raise additional capital.

Bank stocks underperform the broader market

In the first trimester, there was a great disparity between banks’ accounting approaches to potential loan losses – a gap described as “extraordinary” by Magdalena Stoklosa, head of European financial research at Morgan Stanley.

An outlier so far is Deutsche, which only provisioned € 500m in the first quarter, compared to £ 2.1bn at Barclays and $ 3bn at HSBC. The German bank has already said provisions for loan losses would amount to 800 million euros in the second quarter, the highest level in a decade.

For European lenders with large investment banking branches, an increase in trading income should cushion the blow. American banks reported an average 69 percent increase in income from trading stocks, bonds and other assets, benefiting from market volatility and a host of emergency fundraising from large corporations.

Most of those gains came from fixed income, whose earnings more than doubled at JPMorgan, Goldman Sachs and Morgan Stanley.

While European banks on the whole have smaller debt trading activities, Barclays, Deutsche, Credit Suisse and BNP Paribas are in a position to profit the most. On average, analysts expect them to see trading revenues up 40-50%.

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The loot will not be distributed evenly, according to Berenberg’s Eoin Mullany. While Barclays and UBS have increased their share of global revenue over the past year, “in contrast, the loss of market share of European banks has come almost exclusively from Deutsche and Société Générale,” he said. declared.

Investors are also awaiting the results of the European Central BankTuesday’s Covid vulnerability exercise, and an associated decision on the possibility for banks to resume payment of dividends. European, Swiss and British regulators banned payments at the start of the crisis in mid-March to force banks to maintain capital and lending capacity.

Stuart Graham, founder of Autonomous Research, said few investors expected the ECB to allow banks to return to normal payments later this year, saying January 2021 “is a more realistic date.”

However, the clarity of the regulator will mean that fund managers “will know the rules of the game again,” he added. “This could once again attract investors for whom the sector had become on the borderline of investment due to the zeroing of dividends.”

Additional reporting by Martin Arnold in Frankfurt

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