By Lina Saigol
HSBC, Santander and UBS set aside billions in bad loan provisions on Tuesday, as the trio of European banks prepares for credit losses in anticipation of a rise in bankruptcies and defaults caused by economic shutdowns designed to control the spread of the coronavirus pandemic.
HSBC Holdings /zigman2/quotes/208272822/composite HSBC +1.41% took its biggest charge for bad debt in almost nine years and told investors they should expect “materially lower profitability in 2020,” as the Asia-focused lender slashed its pretax profit for the first three months by almost half to $3.2 billion, down from $6.2 billion for the same period a year ago.
One of the world’s largest banks by assets, HSBC set aside $3 billion for expected credit losses in the first quarter and warned that number could rise to as high as $11 billion this year. A large portion of the loan losses was blamed on a “single corporate exposure in Singapore” but HSBC declined to name the borrower, which has widely been reported to be oil trader Hin Leong .
Shares in HSBC /zigman2/quotes/203901799/delayed UK:HSBA +1.34% were trading 0.94% lower in London.
“Banks tend to reassess their credit books — and get stuck into any kitchen-sinking of problem loans — at the end of a year, so the fact that HSBC felt the need to join the big four Main Street banks in the U.S. in taking a cautious view so early on shows how difficult 2020 is likely to be,” Russ Mould, AJ Bell investment director, said.
The six biggest banks in the U.S. increased first-quarter loan provisions by a total of more than $25 billion in the first three months of the year.
Santander’s quarterly net profit plunged by 82% as it set aside €1.6 billion ($1.7 billion) to cover expected loan losses caused by the COVID-19 pandemic.
Overall loan-loss provisions at Santander /zigman2/quotes/205677933/delayed ES:SAN +3.37% spiked 80% after the Spanish bank said it was reserving €1.6 billion specifically for losses linked to the virus, causing an 82% slump in quarterly net profit of €331 million for the first quarter ended in March.
“We will review our strategic targets once we have a more complete understanding of the full impact of the crisis,” Santander /zigman2/quotes/202859081/composite SAN +3.23% chairman Ana Botín said in a statement. Shares in Santander were almost 4 % higher in Madrid on Wednesday.
UBS /zigman2/quotes/206172872/composite UBS +1.44% said the COVID-19 pandemic and the measures taken to contain it have “dramatically changed the global economic outlook for the foreseeable future,” as it reported that its expenses for loan losses rose more than 13-fold in the first three months of the year, to $268 million, from the same period in 2019.
However, the world’s largest wealth manager /zigman2/quotes/206994749/delayed CH:UBSG +0.96% still managed to post a 40% rise in net profits to $1.6 billion, up from $1.14 billion for the same period in 2019, driven by robust performances at its wealth management — which delivered its highest quarterly revenues since 2008 — and its investment bank operations, which reported a $709 million rise in pretax profit, up 242% year-over-year.
“Lower asset prices will reduce our recurring fee income, lower interest rates will present a headwind to net interest income, and client activity levels will likely decrease, affecting transaction-based income,” the bank said.
Shares in UBS were up trading 5% higher.
Analysts have estimated that loan-loss provisions at European banks could quadruple in the first three months of 2020. Credit-ratings firm Fitch last week said it had taken 116 rating actions on Western European banks, mainly revising their outlook to negative.
Last week, Italy’s UniCredit /zigman2/quotes/200769686/delayed IT:UCG +3.28% increased provisions by €900 million, while Switzerland’s Credit Suisse /zigman2/quotes/202835784/composite CS +1.07% reserved 568 million Swiss francs ($584 million) to cover potential loan losses from global corporations and Swiss borrowers who might struggle to bounce back following the shutdown.