Outlook for the European banking sector – March 12, 2020

Following the recent market events, you will find attached a “Flash Note” on the European banking sector.

The world economy and the financial sector are facing a dual threat: a global pandemic triggered by the Covid-19 virus and an oil price war between Saudi Arabia and Russia.

In this note we assess the impact of very strict stress scenarios on the European banking sector.

  • The shock on the energy sector looks like déjà vu (2016). This risk is mainly borne by US banks and remains very manageable for European banks.
  • The impact of the virus, and its short-term consequences on sectors such as aviation, shipping or tourism, could eliminate a significant share of banks’ 2020 profits, but does not, in our opinion, represent a significant risk to banks’ capital.
  • Finally, the impact of a recession (assuming that the virus spreads and quarantine measures are extended to all European countries) shows that only a limited number of banks would face a coupon risk on their hybrid bonds.

In order to mitigate these risks, the ECB’s measures can be summarized as follows: a huge disappointment for sovereign bonds but a massive package designed to support banks.

Since the 2008 crisis, regulators have forced banks to build up very large capital buffers. They are very well capitalized to face stress periods. 

In practice, in our view, banks are almost assured of not coming under significant pressure from the supervisory authorities if they were to face a stress scenario that would affect their capital.