The high-rise buildings in Frankfurt’s banking district tower above the residential buildings in the main metropolis

A wave of bad loans in Germany threatens to hit banks in autumn and winter.

(Photo: dpa)

Frankfurt A little more than a decade after the global financial crisis, high loan losses are again a threat to Germany’s banks. According to current forecasts by the management consultancy Bain & Company, loan loss provisions in corporate banking could rise by up to 150 percent this year, reaching a new record level. The losses would then be even higher than during the financial crisis twelve years ago.

Even before the pandemic broke out, the provision of credit by German banks in corporate banking had increased significantly. In the second half of 2019, banks had to increase their pension plans by 28 percent compared to the same period in the previous year.

If the recession expected by the pandemic turns out to be comparatively mild, the consultants expect an increase in loan loss provisions of around 50 percent this year. In the worst case, however, the banks could have to put in 150 percent more for loans at risk of default.

“The high dependency of many German banks on lending business turns into an Achilles heel in the recession,” warns Bain partner Christian Graf. “When credit risk provisions explode, corporate banking profits erode,” explains the advisor.

This is all the more worrying since this segment was already under considerable margin pressure before the outbreak of the corona pandemic. In the second half of 2019, the Bain Corporate Banking Index dropped in profitability to its lowest level since 2009, and earnings stagnated.

The wave of bad loans hits banks in the autumn at the earliest

This development is depressing the return on equity. According to Bain’s calculations, in 2019 it was below the cost of equity for the first time in ten years, reaching only six percent at the end of last year.

So far, the European and German banks have come through the corona crisis relatively well. The major Swiss bank UBS reported a profit of EUR 1.2 billion for the second quarter, and Deutsche Bank has also already signaled that its earnings for the months of April to June are slightly better than analysts had expected. However, the experts expect that the wave of bad loans triggered by the pandemic will not hit the institutes until autumn at the earliest.

Oliver Wyman’s advice also warns of high loan defaults. European banks would have to face credit losses of over € 400 billion in the next three years as a result of the Covid 19 crisis. In the event of a second comprehensive lockdown, this number could double to 800 billion euros.

The advisors warn that the banks need the help of politicians and supervisors to deal with the dangerous conflict. It is about issues such as consolidation, but also about the completion of the European banking union.

“Otherwise there is a risk of a further weakened banking sector, which is no longer able to finance growth and falls behind the rest of the world,” warns Jochen Peppel, risk expert at Oliver Wyman. Peppel and his colleagues see particular challenges because of the high cost ratio and the low profitability for the German banking system.

More: The eerie boom of zombie companies