A report by consultants Oliver Wyman estimates that credit losses for European banks could reach €830bn over the next three years in its “adverse scenario”.
This would push non-performing loans to 10pc, rising to 12pc in Portugal, 13pc in Italy, and 47pc in Greece. The central case would see €400bn of losses.
So far lenders have taken a hit of just €30bn in loan loss provisions. It said up to half of the European banking system will emerge from the pandemic “in a kind of limbo”, just keeping its head above water.
Lenders do not generate enough from retained earnings to rebuild their defences and will therefore be vulnerable to capital hits. They will instead have to cut their balance sheets by 10-15pc, choking credit for the real economy. A tenth of the banks will be walking dead.
This is no foundation for recovery or the European Green Deal or the great digital transformation, episodically announced with much brave rhetoric.
Remember the Lisbon Summit in March 2000, when EU leaders declared that Europe would overtake the US to become the world’s foremost tech-hub within 10 years? Nobody even had a thought for China then.
Europe’s economic model is built on bank lending. Old-fashioned lenders are the lifeline for the Mittelstand family firms in Germany and for small businesses that account for 70pc of employment in Italy and Spain.
Capital markets make up just a third of all lending in the eurozone, in contrast to America where bond issuance and traded securities account for the lion’s share.
Germany is far from immune to this slow asphyxiation of the banks. Yes, the economy as a whole will emerge from the pandemic in better shape than southern Europe, thanks to better Covid management (test & trace), massive state aid (30pc of GDP) and a policy decision to stay the course on Kurzarbeit job support, which Britain would do well to emulate (but isn’t).
Yet at the same time German lenders are among the least profitable in the OECD bloc. Holger Sachse from Boston Consulting Group in Frankfurt says the pandemic will push a clutch of German banks over the edge. The wave of bad loans will hit in earnest when the country’s moratorium ends in the fourth quarter.
“I expect a domino effect, and there will be a credit squeeze for sure. It has already started,” he said.
Dr Sachse said the net interest margin of German banks – their bread and butter income – has been whittled down from 250 basis points to almost zero by negative rates. Lenders have survived by betting on real estate and relying on implausibly low risk provisioning. Covid-19 has suddenly pulled the rug away.
“The German banks are looking at another five lost years, and those that didn’t do their homework and cut their cost base are going to catch it,” he said.
Whether this includes Deutsche Bank and Commerzbank is an open question.