The key chart

**EA banks’ vulnerability to rising provisions in the wake of the Covid-19 pandemic. Pre-provision profits were only 2.4x provisions in 4Q19**
Source: ECB; CMMP analysis

Summary

In previous posts, I have highlighted how the basic macro building blocks that are required for a sustained recovery in European bank sector profitability are missing. In this post, I use recently published ECB supervisory bank statistics, to illustrate why the sector also remains poorly positioned to absord the impacts of the Covid-19 pandemic at the micro level.

On the bright side, the capital ratios of “significant institutions” (ie, banks supervised by the ECB) rose to 18.4% at the end of 4Q18, the highest level since the ECB began publishing their supervisory bank statistics in 2Q15. The CET 1 ratio was 14.8% (ranging from 12.2% in Spain to 18.8% in Belgium). Non-performing loans also hit a new low of 3.2% at the end of 4Q19 compared with 7.5% at the end of 2Q15 (but remain relatively high in Italy, Portugal, Cyprus and Greece).

However, profitability remains very weak. The aggregate ROE fell to only 5.2% in 4Q19 compared with 6.2% a year earlier. Banks in Slovenia were the only banks in the ECB sample that delivered aggregate ROEs in excess of 10%. Elsewhere ROEs ranged from lows of 0.1% and 0.9% in Germany and Portugal respectively to 7.6% and 8.6% in the Netherlands and Austria respectively. Above average ROEs in Austria, Spain and Belgium reflect higher underlying profitability and lower leverage whereas ROEs in the Netherlands and France also reflect higher levels of leverage.

In a week, when large US banks have announced weaker profits driven to a large extent by higher provisioning levels, the low “pre-provision” profit cover of only 2.4x in the EA is concerning. Pre-provision profits were less than 2x provision charges in 4Q19 in Portugal (1.5x), Germany (1.8x), Italy (1.8x) and Spain (1.9x).

As the old joke goes, “If you want to go there, I wouldn’t be starting here.” Sadly, in this case, there is no humour, as weak profitability threatens the supply of credit at a time when it is needed most.

Please note that these brief summary comments are extracts from more detailed analysis that is available separately