Spanish Greeks and Italians are considered black

Fear of loan defaults: This is how the banks in Greece, Italy and Spain are doing

The profits of 2019 have been burned on the stock exchange. The billion-dollar plus due to the lower risk premiums that came with the pro-European government since September has fizzled out. And now comes the notification to the shareholders that the dividend will not be paid out.

The banks in Italy could not be hit harder by the corona crisis. The institutes are among the losers on the Milan Stock Exchange every day. They have lost around half their value since the beginning of the year.

Italy: imminent bankruptcies

The banks in Italy are under more pressure than others because of their low average profitability and because of their large liabilities in the domestic market and as lenders to small and medium-sized enterprises, write the analysts of Goldman Sachs. They observe the six largest banks in the country, including the two major banks Unicredit and Intesa Sanpaolo. The analysts estimate the total loss in the course of the corona crisis to be five billion euros by 2023.

The chronic problem of bad loans is also coming back. According to the central bank, they had been reduced from 345 billion euros gross in 2015 to 140 billion last year. At the end of 2019, their share of the total balance was around eight percent.

That is still too much for the rating agencies. According to Fitch, the value is significantly above the European average of four percent. And the number could go up again: "A downturn in the Italian economy caused by the extraordinary measures to contain the virus can generate new non-performing loans and increase the number of existing ones again," warn analysts Francesca Vasciminno and Christian Scarafia.

This is exactly what it looks like, even if the numbers are still missing. Production in Italy has been idle for almost two weeks. The industry association speaks of failures in the billions. Many companies will not be able to recover from this. Bankruptcies and loan defaults are looming.

Unicredit was the first bank to respond to the ECB's appeal not to pay out the dividend for 2019. The plan was 63 cents per share. In addition, the share buyback program for up to 467 million euros will be postponed until October. In fact, bank boss Jean-Pierre Mustier's strategic plan called for returns for investors to be increased through dividend payments and buybacks after the plans for a cross-border merger had been postponed. But that was before Corona.

Intesa Sanpaolo followed suit and announced on Tuesday that the dividend of 19.2 cents per share would be canceled and that the entire net profit of EUR 4.3 billion from 2019 would instead be transferred to reserves.

The takeover of UBI Banca with a volume of 4.9 billion euros, which Intesa tackled shortly before the outbreak of the corona pandemic in Italy, is to be pursued. Bank chief Carlo Messina said the merger had become even more important because it would make savings easier and more money available to cover loan defaults.

In the opinion of the brokerage house Equita, postponing the dividend is not enough; it should be canceled completely. Because for the listed banks it is a total of 5.7 billion euros - "a sum that increases equity".

Spain: Hope for recovery

The Spanish government has launched an aid package of around 200 billion euros. At 100 billion euros, the majority consists of government loan guarantees. The state does not guarantee the full amount, but between 60 and 80 percent, depending on the size of the company and type of loan. The banks have to pay for the missing portions if a payment default occurs.

The aim is to provide the market with sufficient liquidity so that all companies can pay their bills without income and avoid bankruptcy. However, this will not work in all cases. Experts assume that the Spanish economy in particular will suffer more from the corona crisis than other countries due to its heavy dependence on tourism and the volatile labor market.

Goldman Sachs, for example, expects the Spanish economy to shrink by 9.7 percent this year. The forecast does not yet take into account the shutdown of the Spanish economy that has now been ordered. The rating agencies Moody's and Fitch lowered their outlook even before the shutdown.

Moodyiertes reduced it for the Spanish banking system from stable to negative overall. The reason given by the analysts is the expected economic slump. "We expect this to increase unemployment and problem credit, and reverse the sustained improvement in assets since 2014," it said. "At the same time, a combination of weaker credit growth, sluggish business activity and increasing write-downs will weigh on banks' profitability."

The analysts of the investment bank UBS also expect that the banks that are mainly active in Spain - such as the third largest domestic institute Caixabank, Banco Sabadell or the part-state Bankia - will hardly achieve any net profits this year.

However, the crisis is basically affecting the Spanish financial institutions in good shape. After the real estate bubble burst in 2007, the industry underwent lasting restructuring, with dozens of small savings banks disappearing from the market. The remaining institutions have reduced their non-performing loans, in February they were 4.79 percent.

The liquidity ratio of the Spanish banks, like the Common Equity Tier 1 capital, is well above the statutory minimum. "Spanish banks are going into crisis from a strong position," says Marco Troiano from the Scope rating agency.

The head of the Spanish central bank, Pablo Hernández de Cos, made a similar statement. The banks "are better capitalized and have been through an important process of cleaning their balance sheets," he said. This would put them in a good starting position to contribute to the rapid recovery of the economy.

"Unlike in the 2008/2009 crisis, when the banks were seen as the source of the problem, the governments now have a great interest in helping the banks," says Troiano. “Everyone knows that if the economy is to suffer less and to be able to recover, then the banks must be able to grant loans. This time they are seen as part of the political solution. "

In order for the banks to have enough capital, the ECB has asked them to postpone their dividend payments at least until October. Some Spanish institutions have adjusted their dividends, while others are sticking to the payout.

In addition, the banks rely on gestures of goodwill. The BBVA top will forego its variable remuneration in 2020. Santander boss Ana Botín halved her salary and that of her CEO; non-executive directors receive 20 percent less. The group also wants to review its bonus policy, "so that the maximum amount of funds needed is geared towards customer support," says Santander.

Greece: Lots of contaminated sites

The corona crisis hits Greece's banks in a delicate phase. Last year the four systemically important institutions were in the black, but their profitability is weak. Because the financial industry is still struggling with the consequences of the Greek debt crisis. It emptied the banks.

The financial institutions lost almost half of their income and had to be recapitalized three times with state aid. The heaviest legacy: 37 percent of the loans granted have not been serviced for 90 days or more or are considered to be at risk of default.

The banks had already made good progress in reducing problem loans in recent years: With sales, write-downs and rescheduling, they were able to reduce the total of bad debts from 107.2 billion euros in 2016 to 68 billion euros by the end of 2019. By the end of 2021, the banks wanted to push the rate below 20 percent and thus halve it compared to the current level.

But that planning is in jeopardy. Because now the framework conditions are changing dramatically. Instead of growth of 2.8 percent, Finance Minister Christos Staikouras expects economic output to decline by three percent in 2020. Other forecasts are even in the order of minus five to 15 percent. For the banks this means new credit risks. Financial experts expect losses of around ten billion euros.

"The banks are already feeling the first effects," reports Jakob Suwalski, Greece analyst at Scope: "Customers are under cash flow pressure and are asking for bridging financing and higher credit lines." The longer the shutdown in Europe, the greater the challenges for the banks.

Companies, employees and self-employed who are affected by business closings can suspend the repayment of their loans for three to six months. The state takes over the payment of the interest for the grace-free months. How the later payment of the outstanding installments will be regulated is still unclear.

The delay reduces the banks' liquidity. At the same time, however, it can also help to save debtors who will have to fight for their livelihood over the next few months. The corona crisis hits the catering, tourism and retail sectors the hardest. “We hope that most companies will be able to service their loans again from autumn onwards,” explains a banker from Athens.

But that is not certain. Greece's economy is dominated by small and medium-sized companies. 50 percent of the companies have fewer than 20 employees. Many of them have thin capital bases and little liquidity. The banks will therefore face difficult decisions in the near future, says Greece expert Suwalski: Which company is only illiquid because of Corona, but basically viable? And which one is 'switched off'?

The core capital ratio of the Greek banks is still 16.5 percent in the industry average, well above the minimum requirements. However, new loan defaults could weaken banks' capitalization. Regulatory measures that have already been adopted by the European banking supervision, such as the easing of provisions for bad debt risks, give the institutions some breathing space.

But no one can say today whether the relief will be sufficient to secure the capitalization of the banks. Scope analyst Suwalski does not rule out the need for national or European support measures for the banks.

More:Deutsche Bank is discussing a Management Board bonus waiver for 2020.