DBRS Morningstar: European Banks' Cost of Risk Increases in Q2; Provisioning Approach Still Varies

DBRS Morningstar has published a commentary that focuses on the Cost of Risk (CoR) and NPLs reported by a sample of 40 banks in Europe, including banks in France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Denmark, Finland, Ireland, and the United Kingdom (UK).

Key highlights include:

• There was greater consistency in provisioning levels in Q2 compared to Q1, as banks incorporated the challenging negative economic outlook into their loan loss provisions
• Some differences still exist in provisioning across European banks, particularly in relation to Stage 2 loans. The average CoR for the sample of Banks was at a high level of 119 bps in Q2. This compares to 86 bps in Q1 2020, and 38 bps in FY 2019
• Non-Performing loans (NPLs) did not experience a material increase in H1 2020, which is in part thanks to the different support measures adopted at European and country level to prevent asset quality deterioration under the current environment

“Following on from the trend seen in Q1 2020, European banks continued to report elevated loan loss provisions and high levels of Cost of Risk in Q2 2020 as a result of the negative impact of the Coronavirus disease and the economic lockdowns imposed in many countries for most of Q2. There were still some differences in provisioning levels between countries. And at this point in the crisis, it still remains to be seen to what extent this is due to differing loan loss expectations, versus a different approach towards the timing of provisioning. In some cases it could also be driven by banks' differing capacity to absorb provisions.”, said Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team.