The key chart

**SX7E banks index is 52% below its February peak and is re-testing April’s lows**
Source: FT; CMMP analysis

Pressure from rates and spreads

Key charts and summary points

**Costs of borrowing hit new lows in the euro area at the end of 1Q20 (%, nominal terms)**
Source: ECB; Haver; CMMP analysis

The aggregate cost of borrowing for euro area (EA) households (HH) and corporates (NFC) hit new 15-year lows at the end of 1Q2020, intensifying the pressure on banks’ top-lines. Lending spreads (versus 3M Euribor) were also at (HH) or close to (NFC) their 5-year lows.

**Lending spreads at, or close to, 5-year lows (bp spread versus 3M Euribor)**
Source: ECB; Haver; CMMP analysis

In the HH sector, above average declines in the cost of borrowing over the past 12 months have occurred in Germany (-52bp), the Netherlands (-50bp), and Italy (-47bp) with new lows in the cost of new HH loans being recorded in these economies and also in Latvia and Slovenia. The rate on outstanding HH loans hit new lows in every EZ economy at the end of 1Q20 with the exception of Estonia, France, Ireland, Latvia, Lithuania and Spain.

**Above average declines in HH costs of borrowing have occurred in Germany, the Netherlands and Italy over the past 12 months (change in bp)**
Source: ECB; Haver; CMMP analysis

In the NFC sector, above average declines in the cost of borrowing over the past 12 months have occurred in Ireland (-76bp), Spain (-38bp), Italy (-35bp), France (-24bp) and Portugal (-19bp), with new lows being recorded in Ireland, Italy, the Netherlands and Portugal. Once again, the list of EZ economies where the rate on outstanding NFC loans was not at a new low was relatively small – Estonia, Ireland, Latvia, Lithuania and Malta.

**Above average declines in the cost of NFC borrowing have occurred in Ireland, Spain, Italy, France and Portugal over the past 12 months (change in bp)**
Source: ECB; Haver; CMMP analysis

I have argued how QE has shifted the balance of power away from lenders and towards borrowers in previous posts.

**Portugal, Italy, France, Belgium and the Netherlands have seen the largest reductions in HH borrowing costs since May 2014 (change in bp)**
Source: ECB; Haver; CMMP analysis

With the exception of the Irish HH sector the cost of borrowing has fallen more than the MRR and 3M Euribor in every EZ economy since May 2014. The biggest declines in the HH sector have occurred in France (-190bp), Belgium (-164bp) and the Netherlands (-115bp) over this period.

**Italy, the Netherlands, Belgium and France have seen the biggest declines in NFC borrowing costs since May 2014 (change in bp)**
Source: ECB; Haver; CMMP analysis

In the NFC sector, the biggest declines have occurred in Italy (-226bp), the Netherlands (-222bp), Belgium (-198bp) and France (178bp).

So while the ECB has been largely successful in achieving its goal of ensuring, “that businesses and people should be able to borrow more and spend less to repay their debts,” this has come at the cost of leaving EA banks poorly positioned in terms of pre-provision profitability to face the impacts of the Covid-19 pandemic at the micro level.

**EA banks’ weak pre-provisioning profitability leaves them poorly positioned to face the impacts of the Covid-19 pandemic in terms of rising loan-loss provisions (EURO millions, % total assets)**
Source: ECB; Haver; CMMP analysis

At €48.90, the SX7E index is re-testing its €48.70 low (21 April 2020) for good reason. On-going pressure from rates and spreads add to severe macro-headwinds and leave banks, and their investors, highly exposed to rising provisions during 2020.

**The key chart repeated – the SX7E index is re-testing lows for good reasons.**
Source: FT; CMMP analysis

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