AIM FOR REVIVAL. NOT JUST SURVIVAL.
European Banking Outlook 2020 - Oliver Wyman
Europe’s banks are set to take a large financial hit from the COVID-19 crisis, both in credit losses and in several years’ worth of weaker earnings that are expected to follow. After a decade of strengthening balance sheets, however, the industry looks sufficiently robust to sustain the economic shock and expected credit losses.
Banks have worked hard to maintain their operations and to support their customers during the lockdowns thus far, and they are partnering with governments to protect the economy. Some goodwill, in short supply for years, is being replenished.
In this European Banking report, we therefore look at whether this is a moment that could bring about more far-reaching and much needed changes to the industry.
Europe’s banks are entering a period of high credit losses in both corporate and retail portfolios, combined with a slowing of new business and compressed margins. By 2022, the fortunes of banks will vary more than today and the industry as a whole will still be suffering from weak economics.
Our report estimates that European banks, defined as those reporting data to the European Banking Authority (European Union, United Kingdom, Norway), face more than €400 billion of credit losses in the next three years. This is two and a half times the total provisions made over the previous three years, a period of relatively low losses. Losses from COVID-19 would be less than 40 percent of those experienced during the global financial crisis of 2008-10, and a similar overall level to the Eurozone crisis of 2012-14.
At this level of losses, 70 percent of banks in the European Union and United Kingdom will maintain a core tier-one equity (CET1) ratio of greater than 12 percent. Considering the size of the economic shock, this can be considered a success for banks and a validation of post-financial-crisis prudential reforms.
In our analysis of the European banking sector, we look at whether the pandemic is a moment that could bring changes to the European banking industry.
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