The coronacrisis has left a massive dent in the earnings of big banks. Analysts expect Credit Suisse to take a major provision to prepare for worse to come.
UBS had a solid half-year report to show for last week, but for the value adjustment of $272 million for the second quarter – finews.com reported. The major component thereof was 104 million Swiss francs ($113 million) for the Swiss retail and corporate clients’ business.
Arch-rival Credit Suisse may follow suit on Thursday – and it may have a nasty surprise for its investors. Analysts at U.S. giant Citigroup expect an increase of provisions in the second quarter by 1,300 percent compared with a year ago, according to a report by the «Financial Times» (behind paywall). The estimate puts the Swiss firm top of the league among European big banks.
Early Warning Was Given
Naturally, the increase needs to be put in perspective. In the second quarter of 2019, nobody in the industry knew anything about the impending pandemic and the provision taken for the second quarter amounted to a mere 25 million francs.
The Swiss bank in April had reported that it had taken provisions worth 568 million francs for credit risks, sevenfold the figure of last year. The company also warned that further provisions and value adjustments might become necessary in later quarters, in particular in the corporate banking and for loans outside Switzerland and with regard to asset management investments.
V-Shaped Recovery Becomes Elusive
And Credit Suisse obviously isn’t alone. Citigroup’s analysts expect Europe’s major banks to take provisions worth some 23 billion euros in total, after 25 billion euros in the first quarter. The five biggest banks of the U.S. have had to put $61 billion in the first half to adjust for the effects of the pandemic.
The optimistic scenario of a V-shaped recovery has become elusive and only few economists now expect such an outcome. Oliver Wyman consultants recently said that European banks would have to contend with loans losses of as much as 800 billion euros over a three-year period.
Value Adjustments
Some investors worry that this will be followed by a round of capital increases to stabilize the balance sheets, which would likely lead to widespread falls of the stock market valuation. European banks currently trade at about 40 percent of their book value, with UBS and Credit Suisse at 0.77 and 0.47 faring better than most. The Citigroup analysts have maintained their buy-recommendation on the Credit Suisse equity.
While loans losses are likely to follow the economic crises, banks rely on brisk business in other segments, such as trading. Credit Suisse’s global markets trading unit has done well in the past and it may yet surprise with a huge profit in the quarter.
