Global banks are taking steps to weather the wider impact of war and runaway inflation as the flow of central bank money that has kept them afloat for more than a decade is cut off. But if policymakers hope banks will help stave off recession by turning on their lending taps, they could be disappointed, bankers, analysts and investors told Reuters.
Banks are quickly facing a sharp increase in the risk of doing business as companies and individuals juggle higher lending costs and soaring costs. Meanwhile, Russia’s invasion of Ukraine has pushed Europe to the brink of recession and caused losses for banks such as France’s Societe Generale and Austria’s Raiffeisen.
French bank Crédit Agricole and Italy’s UniCredit have also provisioned for war-related losses, but the effects, although felt most strongly in Europe, reverberate around the world. “The war and its impact on price inflation are a game-changer,” said Carsten Brzeski, an economist at Dutch bank ING, adding: “Consumers will take years to recover their purchasing power, lost due to the ‘inflation. And businesses also get hit’.
What worries some investors is that cracks are already starting to appear in bank balance sheets, with results showing that the capital cushions of JP Morgan, Barclays, HSBC, Morgan Stanley, Bank of America, Credit Suisse and Citi have all declined in the first three months of 2022. The protracted end of a 40-year bond bull run has resulted in painful losses for many banks, while others are also racking up problematic debt after the pandemic lockdowns that crippled global trade and shut down thousands of businesses around the world.
Some banks shied away from buying back low-value shares given their falling capital, despite posting strong profits at investment banks, helped by financial market volatility. “We were expecting huge buybacks and then these were suddenly canceled or moderated,” said Barrington Pitt Miller, chief investment officer of Wykeham Overseas Advisors.
“People thought the big banks were sitting on huge excess capital positions…that dynamic is now in tatters,” he said. LOSS OF INTEREST
While the rise in interest rates should in theory be good news for banks, which can normally increase their margins and therefore their profits, the situation is not as clear cut in 2022. The historic rise in rates of 50 basis points basis (bps) of the Federal Reserve on Wednesday signaled that the world’s largest economy is more concerned about inflation than slowing growth.
And in Europe, borrowing costs are moving in the same direction. The European Central Bank could raise interest rates as early as July, sources told Reuters, while the Bank of England raised rates by 25 basis points to 1% on Thursday and warned Britain risked a double blow of recession and inflation above 10%. Rising rates may help some lenders take advantage of hedging taken out to offset bond market falls, but they’re also forcing banks to tighten affordability controls, with many customers struggling with repayments of loans, cards credit and mortgages.
Last month, JP Morgan chief executive Jamie Dimon warned of the economic fallout from war and soaring inflation, after the largest US bank’s first-quarter profits fell. JPMorgan is seen as a gauge of the US economy and its results bode ill for banks around the world.
“The recessions of the 1980s and 1990s followed a rebound in inflation similar to what we see today,” said Keith Wade, chief economist and strategist at Schroders. GREAT DEPRESSION
The European Commission has predicted that the economy of the 19-member euro zone will contract by a record 7.7% this year, a recession that European Economics Commissioner Paolo Gentiloni said had not been view from the Great Depression. This scenario is largely driven by the shock of the biggest assault on a European state since World War II and the damage to economic engines like Germany, which depends on Russian oil and gas for its energy needs.
The EU on Wednesday proposed its toughest sanctions yet against Russia, including a gradual oil embargo that could lead to further problems for borrowers and banks alike. Consultancy EY forecast this week that 3.4% of European loans will remain unpaid this year, and rise again in 2023. That’s far more than the 2.4% recorded last year, although in below the levels of default observed in the aftermath of the eurozone debt crisis.
EY also predicted that loan growth would generally slow. Restructuring firm Begbies Traynor is also predicting bleak times, after reporting a 19% year-on-year rise in critically financially distressed UK businesses in the first quarter as COVID relief measures falter and costs soar. arrow.
Ken Orchard, fund manager at T. Rowe Price, said that while rising rates normally provide an opportunity to lend, now was “not the right time to add credit” amid conflict in Ukraine and poor prospects for Chinese growth.
(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)