Economic fallout from the coronavirus outbreak will cause a sharp rise in loan losses at European banks, two research reports showed on Tuesday, with more than 400 billion euros ($458 billion) of losses estimated in the next three years.
Loans to small and mid-size enterprises and unsecured consumer loans in Europe, which grew by more than 20 percent between end-2014 and June 2019, were seen most at risk, a report from credit ratings agency Moody's Investor Service showed.
Separately, a report from Oliver Wyman said European bank credit losses could spiral to 800 billion euros if the region succumbed to a second comprehensive lockdown to curb the spread of the virus.
These credit losses compare with the euro zone crisis of 2012-14, but represent less than 40 percent of the losses experienced in the global financial crisis of 2008-10, the consultancy said.
"The pandemic is unlikely to cripple the European banking sector, however many banks will be pushed into a 'limbo state', with very weak returns," Christian Edelmann, Co-Head of EMEA financial services at Oliver Wyman said.
"Ambitious restructuring efforts will be needed, but to succeed they will need engagement and support from policymakers and regulators," Edelmann said, pointing to possible benefits from consolidation and creation of a single banking market.
The Moody's report assessed the exposure of 14 large European banking systems to SME and unsecured consumer loans, using data gathered by the European Banking Authority (EBA).
According to the report, banks in southern Europe are most exposed to SMEs, while large banking systems like Germany and the UK, have exposures below the 15 percent European average.
Exposures to unsecured consumer loans are highest for banks in Spain, Austria, France and the UK.
The coronavirus economic downturn is expected to drive a deterioration in loan quality, with the percentage of problem loans estimated to rise by between 100-300 basis points by 2022 for most European banks, Moody's added.
Government stimulus will not completely offset the financial and economic damage inflicted by the pandemic and the full extent of loan quality deterioration will be revealed only once these measures are unwound, the agency said.
Problem loans in these segments at European banks were 8.5 percent and 5.6 percent respectively at the end of June 2019, following a decline from 18.5 percent and 8.1 percent respectively in June 2015. This compares with 2.1 percent for larger corporates and 2.7 percent for residential mortgages.