Lockdowns Cast a Shadow Over Europe's Banks Despite Strong Earnings -- Update

By Simon Clark and Giovanni Legorano

European banks are mostly upbeat about their performance in the third quarter despite the ravages of the coronavirus pandemic on the economy. But amid more positive signals Thursday were reminders of stiff long-term challenges facing the industry.

Banks are still adding to provisions to guard against loans going sour as some businesses struggle to meet their obligations, a problem worrying executives and regulators across the continent. French lender Société Générale SA set aside EUR518 million, equivalent to $607 million, in provisions in the third quarter, 57% more than the amount in the same period last year, even as it returned to profit after losing money in the first half. Italy's UniCredit SpA set aside EUR741 million for credit losses, up 32% from a year earlier, as net profit jumped from the previous quarter but fell from the same quarter last year.

UniCredit Chief Executive Jean Pierre Mustier said the bank would further increase provisions in the fourth quarter to prepare for a rise in bad loans.

The region's lenders are grappling with low interest rates, which are now expected to remain in place for longer as central banks try to reignite economies. Dutch lender ING Groep NV said Thursday it is facing margin pressure as customer deposits -- which have become a headache for banks since the European Central Bank started charging them to park excess liquidity -- have risen and lending has slowed down.

The Bank of England has asked lenders to prepare for the possibility of negative interest rates. The U.K. central bank announced another dose of bond purchases Thursday, becoming the first major central bank in Europe to boost stimulus measures in response to a second wave of coronavirus infections.

German lender Commerzbank AG on Thursday reported weaker net interest income for the third quarter, which, when combined with restructuring costs, drove the bank to a loss in the quarter and likely for the entire year. Shares of Commerzbank and ING were down more than 6%.

During the summer, governments across the continent eased restrictions introduced to rein in the coronavirus, helping trigger a pickup in economic activity and boosting lenders.

But that progress could be stymied as France, Germany and other nations lock down their populations to stem soaring infection rates. European governments have provided huge financial support to companies and banks in efforts to protect them during the crisis. They have stepped in to guarantee loans, introduced loan payment holidays and financed furlough schemes and additional unemployment benefits. That means the full extent of damage to underlying businesses is unclear.

U.K. banks have the additional concern of the country ending this year without a trade deal with the European Union. Ewen Stevenson, the chief financial officer of London-based HSBC Holdings PLC, said last week that the bank could add as much as $1 billion in provisions in the fourth quarter if a trade agreement isn't reached.

Société Générale said Thursday it fared better in the third quarter, returning to profit after losing money in the first half of the year because of problems in its trading unit. The French bank has been doubly hit by a dearth of dividend payments in Europe this year. As with all the region's lenders, Société Générale has had to refrain from paying dividends to shareholders because of a regulatory requirement that has weighed on stock prices. But the Paris-based bank was particularly affected because it specializes in creating structured products tied to shareholder payouts. This forced Société Générale to take major losses in the first and second quarters as the pandemic upended trades.

Société Générale CEO Frédéric Oudéa said the third-quarter results showed the bank's ability to "rebound after the exceptional lockdown period." The bank's shares have dropped 57% this year, making it one of the biggest fallers among European lenders. Its shares rose more than 3% Thursday.

--Patricia Kowsmann contributed to this article.

Write to Simon Clark at simon.clark@wsj.com and Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

November 05, 2020 09:08 ET (14:08 GMT)

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