EU Banks Prep For $26B In Q2 Loan Losses

European banks are preparing to take huge losses on their loans as COVID-19 keeps taking its toll on financial institutions.

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

That’s in addition to 25 billion euros ($29.1 billion) in potential defaults recorded in the first quarter (Q1).

When $61 billion in losses by the five largest U.S. banks from January through June are figured in, the combined figure from the biggest western lenders could reach $117 billion, the newspaper reported.

Citigroup said that’s the biggest financial loss since the first half of 2009, after Lehman Brothers collapsed. The losses stemmed from Lehman having held large positions in subprime mortgage tranches when securitizing the underlying mortgages.

If there’s a second wave of the coronavirus, Oliver Wyman, the New York-based management consulting firm, forecasts as much as 800 billion euros ($931.4 billion) in loan losses for European banks over the next three years.

Jon Peace, an analyst at Credit Suisse, told the FT that under new accounting rules, banks are required to front-load their provisions for likely losses. But at the end of Q1, banks figured GDP growth and employment would improve.

Last week, UBS, the Swiss multinational investment bank and financial services company, posted a 43 percent surge in earnings at its investment banking arm. But it also took another $272 million of loan loss charges. That brought the total losses in the first half of the year to $540 million, or 16 times the same period in 2019, the newspaper reported.

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

The EU’s banking industry is still smarting from the 2008-09 financial crisis. Shares in European banks have dropped to an average of 31 percent this year.

In April, the EU’s industry chief Thierry Breton said a $1.7 trillion relief package will likely be necessary to help the 28-bloc membership.

“It is a universal consensus that given the headwinds, investing in banks is as stupid an activity as investing in oil majors,” Richard Buxton, head of U.K. Alpha strategy at Jupiter Asset Management, told the FT. “It is unlikely that anything revelatory emerges from this reporting season to change that.”