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CommentLeader

Europe’s banks: curb your enthusiasm

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There are plenty of reasons to be cheerful about first quarter bank results, but it’s too early to be excited.

A casual look at the latest round of results from European banks would tell you the sector has seen off the darkest days of the coronavirus pandemic and emerged stronger.  

Capital ratios have trended higher, while operating profits have doubled on average versus the same period last year. Much has also been made of asset quality, with banks yet to bear many losses from borrower defaults.  

But for all the hopefulness of the first quarter, it is far too soon to declare the crisis averted.  

Capital ratios are still being held up artificially across the sector by temporary prudential relief measures.  

And where banks felt able to make early releases of loan loss provisions, their moves tended to flatter profits and disguise a year-on-year decline in total income.  

The ability to release provisions has often come down to whether or not banks feel confident enough to feed more economic optimism into their financial accounting models.  

While there is surely less risk of a meltdown now, the uncertainty hasn’t gone away completely.  

Many governments and central banks have yet to cut the umbilical cords for companies and households, which will be the true test for asset quality in the coming months.  

Ewen Stevenson, HSBC’s group CFO, put it well on an earnings call this week: “There still is a pretty broad array of outcomes, depending on how we progress out of Covid.”  

Plenty of reasons to be cheerful, yes, but plenty of reason to be cautious, too.  

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