KEY POINTS

  • The 15 biggest banks in the U.S. have already set aside $76 billion for potential loan losses
  • Their European peers have put away some $56 billion
  • Accenture warned that in the present crisis, losses from bad debts may surge to $880 billion by the end of 2022

Banks across the U.S. and Europe are preparing for the full impact of the COVID-19 pandemic as untold numbers of loans will go bad and companies expect to file for bankruptcy protection. As a result, lenders have taken out provisions for loan losses at a scale not seen since the financial crisis of 2008-09.

While lenders like UBS (UBS) and Santander (SAN) have weathered the crisis fairly well due to their huge wealth management arms, other banks are preparing for massive loan losses.

Citigroup data revealed that the 15 biggest banks in the U.S. have already set aside $76 billion for potential loan losses, while their European peers have put away some $56 billion.

That total provision of $139 billion is the highest since these banks put aside $186 billion in the second half of 2009 during the depths of that previous crisis.

Consulting firm Accenture warned that in the present crisis, losses from bad debts may surge to $880 billion by the end of 2022.

“It’s a fool’s game trying to predict the ultimate credit losses from the crisis,” Jaime Ramos Martin, a fund manager at Aviva Investors of London, told the Financial Times. “Now more than ever, it’s about picking the business models that are right for the future and sticking with them.”

Vikram Pandit, the former chief executive at Citigroup (C) told the FT that banks are wisely preparing for catastrophe.

“They are being quite prudent, they’re using some of this money they’re getting from the government to pay down debt, to reduce their balances, they’re spending a little bit less,” Pandit said.

Moreover, with interest rates at or near or below zero on either side of the Atlantic, banks are pressured even more by thinning lending margins.

The FT warned that the weakest and smallest banks might not survive the current crisis. For the largest banks, they may survive, but with lower profits and reduced dividends.

“For the large national banks, facing zero interest rates into the foreseeable future and the significant credit exposure, how can one be confident?” said Bob Diamond, the former boss at Barclays (BCS). “Please explain to me where earnings are coming from?”

Some banks like Morgan Stanley (MS) have delivered strong results this year due to their robust trading businesses. But Jamie Dimon, the CEO of JPMorgan Chase (JPM) warned this trading bonanza is unlikely to last.

Meanwhile, investors have punished banking stocks this year -- European bank stocks have dropped 39%, while the Nasdaq Bank Index has plunged more than 33%. This sell-off has occurred despite the fact that some lenders have delivered better-than-expected results.

“Banks have fulfilled their role in the macroeconomy this time,” said Philipp Hildebrand, vice chairman of BlackRock. “But in Europe at least, they have not performed from a shareholder point of view.”

A number of big banks, including Wells Fargo (WFC), have incurred huge losses, while others have cut their dividends or planned huge job cuts, like HSBC (HSBC).

“Bank management has been focused on survival until now, avoiding banana skins and appearing socially useful, which they’ve done very well,” Stuart Graham, founder of Autonomous Research, told the FT. “But as they come up for air and look to 2021 and 2022, there is a lot of pressure to fundamentally readjust their cost base, organically or through consolidation. If this crisis isn’t the motivation to finally address it, what is?”

While some analysts think the trillions of dollars in stimulus packages unveiled by governments in Europe and U.S. may soften the blow for banks — and lead to much-needed consolidation in the industry — others are less optimistic.

“Waiting for consolidation is like waiting for Godot, it just doesn’t come,” Ronit Ghose, head of bank research at Citigroup, told FT. “So instead we face more cost cuts, sadly.”

Indeed, government support programs, including wage subsidies and small business loans, will eventually expire, placing millions of borrowers and businesses in jeopardy.

Meanwhile, most bankers in the U.S. do not expect the economy to recover this year or next.

American Banker reported that a survey of banking executives indicated they think they will be dealing with the pandemic’s impact well into 2022 or later. They are especially worried about commercial real estate

“It confirms what everyone is hearing,” said Paul Weinstein, a senior adviser to Promontory Interfinancial Network, which helped put the survey together. “When Starbucks closes 400 of its storefronts and major retailers are deciding to use bankruptcy to get out of their leases, it’s not surprising that banks would say we may have a problem in commercial real estate.”