DBRS on European Banks [april 2023]
Low Cost of Risk In 2022 With Signs of Deterioration
DBRS Morningstar has released a commentary on the cost of risk (CoR) of banks in Europe, including banks in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Ireland, the Netherlands, Norway, Portugal, Spain, Sweden, and the United Kingdom.
European banks reported low levels of cost of risk (CoR) in 2022 - similar to or even lower than in 2021 and pre-pandemic 2019 levels. However, most banks reported higher levels of CoR for the full year 2022 than in H1 2022. This deterioration is likely due to banks adjusting their credit models to the more uncertain economic outlook driven by elevated inflation and steady interest rate rises that happened in the second half of 2022.
DBRS expects European banks to report higher levels of CoR in 2023 most likely driven by asset quality deterioration rather than economic model adjustments. In 2022 banks continued to make use of the significant provisioning buffers built up during the pandemic, but banks did not benefit from the significant releases of provisions they had in 2021.
2022 was an unprecedented year for interest rate rises. The Bank of England increased interest rates 10 times from 0.5% at end-2021 to 4.25% in March 2023; the European Central Bank increased rates for the 5th time in March 2023 to 3.5% from 0% at end-June 2022 and; both the Swedish Riksbank and Norges Bank increased interest rates to 3% in March 2023.
DBRS expects to start seeing the challenges that the new interest rate environment will have on borrowers’ capacity to repay their debt during 2023. This will likely lead to higher Non-Performing Loans (NPLs) and provisioning at the banks, pushing up CoR levels. However, we consider it is less likely that we will see the same CoR levels as in 2020, as this was driven by the shutdown of economies globally due to the pandemic.
The commentary focuses on the CoR reported by a sample of 45 banks in Europe in 2022, including banks in Austria, France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Denmark, Finland, Belgium, Ireland and the United Kingdom (UK). Afull list of European banks covered in the research is available in the Annex.
The average CoR for the sample of European banks was 25 basis points (bps) in 2022, broadly in line with the 18 bps reported in 2021, and below 37 bps in 2019. 2022 CoR were also considerably lower than the 80 bps reported in 2020 when most banks reported elevated CoR levels driven by the pandemic. In this commentary CoR is calculated by DBRS Morningstar based on the simple average of loan loss provisions as a proportion of total net loans to customers at amortised cost.
Banks in Spain and Italy continued to show the highest average CoR among the sample of banks in 2022 (Exhibit 1) with 70 bps in Spain and 49 bps in Italy, which is significantly higher compared to the rest of the banks in other European countries.
However, these levels were either similar (Spain) or lower (Italy) than in 2019. In the case of Spain, the average CoR was largely influenced by increasing provisions to cover risks in Brazil at Santander after interest rates rose sharply in H1 2022. In Italy, the average for the sample banks was influenced by higher provisioning levels at the largest banks (UniCredit and Intesa) to cover Russian assets. Banks in France had on average 23 bps CoR in 2022, in line with 26 bps in 2019, and slightly higher than 17 bps in 2021, as banks also booked provisions for Russia-related exposures (both offshore and onshore).
Link to the report:
https://www.dbrsmorningstar.com/research/412834
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