DBRS Morningstar: European Banks Report Lower Cost of Risk in Q3; Asset Quality Deterioration Still To Materialise

DBRS Morningstar has published a commentary that focuses on the Cost of Risk (CoR) and NPLs reported by a sample of 38 banks in Europe, including banks in France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Denmark, Finland, and the United Kingdom (UK).

Key highlights from DBRS Morningstar’s commentary include:
• European banks reported significantly lower levels of provisions in Q3 and the cost of risk (CoR) dropped at most banks from the very high levels of H1
• The lower CoR in Q3 can be explained by the fact that banks already updated their credit models in H1, and there was no need to make significant additional provisions in Q3 as countries came out of lockdown and economies reopened during the summer.
• NPL levels remained broadly stable at end-Q3 2020 compared to H1 2020 as they continued to be supported by the different support measures, such as moratoria, taken to mitigate the impact of the economic contraction on the banks' balance sheets.

“With most countries in Europe entering into semi-lockdown periods in Q4, we expect banks to book additional provisions in Q4 incorporating a more negative economic shock than initially anticipated into their economic models. Also, European banks' deterioration in asset quality is expected to be more visible from Q4 as moratoria periods start to run off. In addition, new moratoria no longer benefit from the preferential regulatory treatment, which was in place until end-September 2020.” said Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team.

The commentary focuses on the Capital Market results of global banks. The full commentary “Capital Market Revenues for European Firms Remained Strong In Q3; Lower Loan Loss Provisions” is available at www.dbrsmorningstar.com.