European banks weather ‘most challenging six months in history’ – Wall Street Journal

Standard Bank reported its profits are likely to plunge by as much as 50% this year as shareholders in South African banks brace for the worst reports since WWII. This reflects the global picture for the banking sector. Second-quarter results from some of the biggest European banks reveal – unsurprisingly – that it's been a very bad year. Germany's Deutsche Bank, the UK's Barclays and Spain's Banco Santander have all reported an increase in loan-loss charges in the second quarter. Deutsche Bank is covering for potential losses on loans to borrowers hurt by the coronavirus pandemic, while Barclays' net profit dropped 91%. Santander reported a €12.6 billion charge from a lower valuation of some previous acquisitions. And while all the banks are saying optimistic things about the second half of 2020, the real effect of the coronavirus epidemic is certainly not yet clear. The Wall Street Journal points out that the Covid-19 pandemic came as many banks in Europe were already having a hard time making money in an extremely low — or even negative — rates environment and an overcrowded banking sector. Tough times ahead, it seems. — Renee Moodie.Europe's banks reveal fuller picture of Coronavirus impact.By Patricia Kowsmann and Simon Clark.Some of Europe's biggest lenders reported a big jump in coronavirus-related losses and provisions for bad loans as the pandemic's impact on their businesses becomes clearer..___STEADY_PAYWALL___.Germany's Deutsche Bank AG, the U.K.'s Barclays PLC and Spain's Banco Santander SA all reported an increase in loan-loss charges in the second quarter, as the companies they bank for struggle to repay debts, and unemployment rises across the regions in which they operate.Deutsche Bank set aside €761 million ($892 million) to cover potential losses on loans to borrowers hurt by the coronavirus pandemic although it reported a small second-quarter profit on the back of strong investment banking performance on Wednesday. Barclays' net profit dropped 91% after it set aside £1.62 billion ($2.10 billion) in provisions for losses from loans. The London-based lender's U.K. unit swung to a loss but its investment bank performed well.Business foundationsSantander, based in Spain but with operations in Europe, Latin America and the U.S., reported a €12.6 billion charge from a lower valuation of some previous acquisitions, which it attributed to the deterioration in the economic outlook caused by the pandemic. The charge is a one-off and won't have impact on its liquidity and capital ratios, but it drove the lender to a second-quarter loss of €11.13 billion."The past six months have been among the most challenging in our history," Ana Botin, the bank's executive chairman, said, but added "the foundations of our business remain extremely strong."Read also: Why top retailers watch Apple in face of Covid-19 – Wall Street JournalAlthough the banks struck a more optimistic tone for the rest of the year, the real impact of the pandemic on Europe's economy still lies ahead. For instance, many programmes that have kept people employed with the support of state money are due to expire later this year.Shares of Barclays were down over 5% in the early afternoon, while Deutsche Bank and Santander fell more than 3%. In a Deutsche Bank conference call, analysts raised questions about the bank's profitability outlook, given the booming investment-banking activities are set to subside.Last chanceThe coronavirus pandemic came as many European banks were already having a hard time making money in an extremely low — or even negative — rates environment and an overcrowded banking sector. Deutsche Bank is particularly vulnerable. Roughly a year ago it announced sharp cost cuts, the exit from certain businesses in the U.S. and the sale of a massive portfolio of risky, loss-making securities in an effort to improve its earnings.Its restructuring — the latest in a string of attempts over the years — is considered by investors and analysts as the lender's last chance to succeed as a stand-alone global bank.But while Deutsche Bank's bread-and-butter lending business has suffered under the pandemic and the negative rates environment, its investment bank got a big boost from clients raising money and moving it around to adapt to the current situation.The bank reported a 46% rise in investment banking revenue in the quarter, more than offsetting its other businesses, including retail lending. Likewise, Barclays said profit at its corporate and investment bank rose 16%. Its U.K. unit lost £123 million in the second quarter, down from a profit of £328 million in the same quarter last year.A firewall in the economic recoveryBarclays Chief Executive Jes Staley said the results were proof of the strength of his universal banking strategy. He has been under pressure from activist investor Edward Bramson, whose firm Sherborne Investors has said it wants Barclays to shrink its investment bank and become a more narrowly focused consumer bank. Mr. Staley told journalists on a conference call that Barclays was in a stronger position than during the previous global financial crisis."Our hope is to be a firewall in the economic recovery and in dealing with the Covid-19 pandemic, much different than what happened with the banks some 10 years ago," he said.Deutsche Bank Chief Financial Officer James von Moltke told reporters on a conference call that investment-banking activity is expected to normalize going forward. Still, the rise has been enough to improve the bank's revenue outlook for the year. Mr. von Moltke said management continues to work toward being profitable, on a pretax level, this year."We are doing everything in our control to deliver our goals," he said.Deutsche Bank has gained from being based in Germany, where the government released big support packages for the economy. Of Deutsche Bank's loan book, 47% is in Germany, followed by 22% in the rest of Europe and 20% in the U.S., according to a recent bank presentation. A chunk of the German loans are to mortgage holders..Read also: Standard Bank profits plunge, as much as 50%, as banks prepare for earnings slump.At Santander, the bank spread its loan-loss charges throughout several geographies, including in Spain, Brazil, Mexico and the U.S. The bank said it is working on the assumption of an economic contraction this year and a recovery over two to three years.Barclays provided about £21 billion of government-backed emergency loans, deferred payments for more than 600,000 customers and canceled some banking fees during the first half of 2020, Mr. Staley said."Clearly we've faced extraordinary economic challenges," Mr. Staley said. "We have tried to be as supportive to our consumers as we can be."Write to Patricia Kowsmann at patricia.kowsmann@wsj.com and Simon Clark at simon.clark@wsj.com

European banks weather ‘most challenging six months in history’ – Wall Street Journal

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