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In our previous blogs, we reported on the COVID-19 pandemic’s impact on the expected credit losses (ECL) disclosed by a selection of large European banks (March 2020 quarter) and five Canadian banks (half year to 30 April 2020).

Here, we look at what those same European banks have disclosed in their 30 June 2020 half-year reports. The number of banks included in each of the analyses below differs because of the differences in the granularity of disclosures.


ECL charges and profitability

Firstly, for 11 banks we looked at the total ECL charge in profit or loss1 and at the profit before tax for the first six months of 2020 against the corresponding period in 2019. The percentage increase in the ECL charge and the change in the profit before tax for each of the banks is shown below.

Changes in ECL charge and profit before tax

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All banks show a substantial increase in the total ECL charge, but the percentage increase varies considerably – from 60% (a Spanish bank) to 1,536% (a Swiss bank), although the latter appears to have had a very small ECL charge in H1 2019.   

Interestingly, the bank with the largest increase in its ECL charge from H1 2019 to H1 2020 reported an increase in its profit before tax in the same period, while the two banks with the smallest increases in the ECL charge reported the largest decline in their profit before tax.

For all of the banks in our selection, we also calculated the average increases2 in ECL charges for Q1 and Q2 2020 from the respective quarters in 2019. The average ECL charge for Q1 2020 was more than six times higher than that for Q1 2019; the average charge for Q2 2020 was more than four times higher than that for Q2 2019.


The loss allowance ratio

The chart below shows the loss allowance ratios3 for loans carried at amortised cost of eight European banks at 31 December 2019, 31 March 2020 and 30 June 2020.

Loss allowance rations of eight European banks

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Banks have continued to build their loss allowances throughout the first two quarters of 2020. The average loss allowance ratio4 for loans carried at amortised cost increased from 1.28% at 31 December 2019 to 1.43% at 31 March 2020 and to 1.55% at 30 June 2020.

Two UK banks also disclosed loss allowances separately for their retail and wholesale loans and their loss allowance ratios for each sector are shown below.

Loss allowance ratio – Wholesale

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While the loss allowance ratio in the retail business has continued to rise steadily each quarter, the wholesale lending business saw a much sharper increase in Q2 compared with Q1. 

Staging of loans

In our earlier blog, we looked at seven European banks that disclosed the analysis of their loans by stages. The graphs below show how the proportions of loans in Stages 2 and 3 have generally continued to grow during the second quarter of 2020.

Proportions of loans in stage 2
Proportions of loans in stage 3

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Two banks saw a significant increase in the proportion of their loans in Stage 2 at the end of Q2. In both cases, this was driven by increases in the wholesale market. Other banks showed moderate or only small increases in their proportions of loans in Stage 2. The average share of loans in Stage 2 for the seven banks increased from 6.77% at 31 December 2019 to 8.28% at 31 March 2020 and 11.31% at 30 June 20205. But – similarly to Q1 of 2020 – the proportion of loans in Stage 3 remained mostly stable.


Forward-looking information

Previously, we have looked at how banks have tackled the task of assessing the impact of the pandemic on the future economic scenarios that they used to measure ECL. So, is there anything additional to note as of 30 June 2020?

The eleven European banks’ half-year reports at 30 June 2020 appear to show that every bank updated the parameters in their macroeconomic scenarios and all banks used the same number of economic scenarios at 30 June 2020, 31 March 2020 and 31 December 2019. However, one bank has attributed a 0% probability to their upside scenario as at 30 June 2020, in effect reducing the number of scenarios to two.

Seven banks disclosed the probabilities they attached to their base, upside and downside scenarios. The majority of the eleven banks have changed their respective probabilities in response to the economic impacts of the pandemic, but the direction of the change varied – i.e. some increased the relative weights of more negative scenarios but some reduced them. 

Probabilities attached to economic scenarios – 31 December 2019 vs 30 June 2020

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Interestingly, two banks assigned higher probabilities to their upside scenarios at 30 June 2020 compared with 31 December 2019.

All eleven banks generally disclosed the key inputs into their macroeconomic scenarios that are relevant to the markets in which they operate. However, as they operate across a variety of different markets, we could not compare those inputs across different banks.

One market for which a comparison could be made is the US, as data for that market was disclosed by five banks in our selection. The base-case assumptions for the US average unemployment rate in 2020 range from 7.8% to 10.6%. The base-case US GDP growth rate assumptions in 2020 range from -4.2% to -6.6%6. For 2021, the base-case assumptions made by those banks for the US average unemployment rate range from 5.0% to 7.6%. The base-case US GDP growth rate assumptions in 2021 range from 3.6% to 6.1%.

Some banks appear to be slightly more pessimistic now about the economic outlook for 2020 and 2021 since their last quarterly reporting in March.  

The majority of the eleven banks reported the use of management overlays on top of the amounts calculated by their ECL models to respond to the economic impacts of the pandemic, government support measures and low oil prices. When disclosed, the quantitative impact of these overlays represented between 2% and 13% of the total ECL balance as at 30 June 2020, which is consistent with the range reported in our previous blog.


What next?

In our blogs, we aim to share with you the emerging information on how banks approached estimating ECL in this unprecedented environment. As more information and data points become available over the coming months, we will continue to monitor reporting by large banks.

1 This is the total ECL charge in profit or loss rather than the ECL charge for the loans held by those banks.

2 The average increases for Q1 (and Q2 respectively) were calculated by adding the percentage increases during the quarter from all banks and dividing this total amount by the number of banks.

3 The loss allowance ratio is the ratio of the closing balance of loss allowance to the closing balance of gross carrying amount of loans measured at amortised cost.

4 The average loss allowance ratio is calculated by adding the loss allowance ratios of all selected banks and dividing it by the number of banks. This means that the average does not take into account the different sizes of bank loan portfolios and loss allowance – i.e. all banks are weighted equally.

5 The average share of loans assigned to Stage 2 is calculated by adding the proportions in Stage 2 and dividing by the number of banks assessed. This means that the average does not take into account the different sizes of bank loan portfolios – i.e. all banks are weighted equally.

6 Where banks disclosed the US GDP growth for 2020 without giving further detail, we have assumed that this means that the growth is for the period from 1 January 2020 to 31 December 2020.

 

Director

KPMG IFRG Limited (UK)

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