The spread of the coronavirus, along with the sharp drop in oil prices has an impact on the investor confidence and causes serious upheavals in the financial markets, according to a new report by DBRS. The situation is evolving rapidly and while the full impact on the European banks remains uncertain, it is sure to be negative.
According to the agency, the NPL portfolio sales to investors may be delayed. In particular, it expects banks in Italy and Greece to be affected the most. Banks in Spain, Portugal and Ireland which have been selling bad loans in 2019 are also expected to experience strong shocks.
The extent of the impact on loan repayments is uncertain, but impairments will likely increase, reflecting lower financial forecasts on impaired models and deteriorating asset quality. In the meantime, the measures adopted by governments and central banks will provide some relief, although they will also create challenges.
In terms of balance sheets, banks are in a better position than at the start of the 2008 crisis, with stronger capital, liquidity and financial assets. However, if the markets remain under significant pressure for a long time, DBRS expects that some banks should seek funding to meet the2020 refinancing needs and suspend debt issuance as market financing will be very expensive and for some banks prohibitive.
DBRS also sees potential operational risks, but technology and regulators should support the operation of the banks.
The agency points out that as the coronavirus crisis erupts, the situation is evolving rapidly. “The full impact on European banks remains uncertain, however, we believe it will be clearly negative. There will be pressure on revenue and pressure on asset quality, and as the situation evolves we could see more measures being announced by central banks and governments to mitigate the economic impact”.
Original Source: Capital
Adaptation/Translation: Kiki Athanasiadis