Europe's Banks Reveal Fuller Picture of Coronavirus Impact -- 5th Update

By Patricia Kowsmann and Simon Clark 

Some of Europe's biggest lenders are revealing the extent of the coronavirus pandemic's impact on their businesses.

Germany's Deutsche Bank AG, the U.K.'s Barclays PLC and Spain's Banco Santander SA all reported a big jump 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 EUR761 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 GBP1.62 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.

Santander, based in Spain but with operations in Europe, Latin America and the U.S., reported a EUR12.6 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 EUR11.13 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."

Although 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 programs that have kept people employed with the support of state money are due to expire later this year.

Deutsche Bank stocks reversed early gains and were down 2% by midday, while shares in Barclays and Santander fell more than 3%.

The 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 GBP123 million in the second quarter, down from a profit of GBP328 million in the same quarter last year.

Barclays 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. Bank officials said the lender has also benefited from limited exposure to some troubled global sectors like cruise lines and tour operators, and smaller hotels, retail and oil-and-gas companies.

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 GBP21 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 [e-mail] and Simon Clark at [e-mail]

(END) Dow Jones Newswires

July 29, 2020 07:43 ET (11:43 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.