EU banks brace for $ 26 billion in second quarter loan losses

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European banks brace for huge losses on their loans as COVID-19 continues to wreak havoc on financial institutions.

The Financial Time reported that the largest banks in the European Union (EU) estimated that there would be at least 23 billion euros ($ 26.8 billion) in potential losses in the second quarter (Q2), according to Citigroup.

This is in addition to the 25 billion euros ($ 29.1 billion) of potential defaults recorded in the first quarter (Q1).

When $ 61 billion in losses by the five largest U.S. banks from January to June are calculated, the combined figure of the largest Western lenders could reach $ 117 billion, the newspaper reported.

Citigroup said it was the biggest financial loss since the first half of 2009, after the collapse of Lehman Brothers. The losses are due to the fact that Lehman held large positions in tranches of subprime mortgages during the securitization of the underlying mortgages.

If there is a second wave of coronavirus, Olivier Wyman, the New York-based management consultancy, forecasts up to 800 billion euros ($ 931.4 billion) in loan losses for European banks over the next three years.

Jon Peace, a Credit Suisse analyst, told the FT that under the new accounting rules banks are required to anticipate their provisions for probable losses. But by the end of the first quarter, banks believed GDP growth and jobs would improve.

Last week, UBS, the Swiss multinational investment banking and financial services company, recorded a 43% increase in profits in its investment banking arm. But it also took an additional $ 272 million in loan loss charges. That brought the total losses in the first half of the year to $ 540 million, 16 times the same period in 2019, the newspaper reported.

“The first trimester was about whether you are resilient and, for some, able to survive,” Sergio Ermotti, the CEO of UBS told the FT. “The second trimester will be about whether you can adapt. We have already entered the “lessons learned” phase of the coronavirus. “

The EU banking sector is still suffering from the 2008-09 financial crisis. Shares of European banks have fallen to an average of 31 percent this year.

In April, EU industry chief Thierry Breton said that a $ 1.7 trillion relief package will likely be needed to help the 28 members of the bloc.

“It is a universal consensus that given the headwinds, investing in banks is as dumb a business as investing in oil majors,” Richard Buxton, UK Alpha Strategy Manager at Jupiter Asset Management, told FT. “It’s unlikely that anything revealing will emerge from this reporting season to change that.”

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