For the past few weeks, I posted a number of times to watch Europe, especially the banking industry.
Today, we got some insight into how bad things are.
The UK bank HSBC and the Eurozone's second largest bank, Santander, both reported their first quarter numbers. The results were not pretty. It appears the effects of the coronavirus are starting to take a toll on some of the largest banks.
HSBC reported a decline of almost 50% on their net profits from a year ago. The numbers went from $6.2 billion to $3.2 billion.
Santander fared even worse. It took an 82% hit to profit as a result of having to add $1.7 billion to offset predicted loan losses.
The net profit came in at $360 million.
Both banks are expecting huge increases in bad loans. HSBC believes that number could hit $3 billion for that bank alone.
The impact from the shutdown of the global economy is only starting to be felt by businesses. These numbers reflect only a portion of a quarter affected by the virus. Depending upon how long the lock down last in countries around the world, it is possible that the quarter 2 numbers will be even worse.
While it is unlikely that banks of this size go under, it is viable to many smaller banks start to go under. In early April, a West Virginia bank was shut down. During the last crisis, hundreds of small banks were shuttered and their assets sold off.
European banking is an interesting situation since, unlike the U.S. banks, there were no bailouts. When the government bailed out the banks, they instill higher capital requirements while also limiting how far they could leverage.
In Europe, since no country wanted to assume the debt for another, the banks were basically on their own. Hence, most of the banking system is very weak. We saw some insight into this as the crisis in the Repo Market kicked off, requiring the Fed to instill tens of billions in over night lending to keep the market liquid.
Nobody wanted to take the risk of loaning to a bank with a great deal of exposure to European banking. Since nobody truly knows the extend of the risk, banks just opted to avoid each other.
This situation is only going to get worst. Just yesterday, Angela Merkel told Germans they should cancel their summer travel plans. It is another situation which further hurts the southern EU countries.
Couple this with the fact that Italy is the favorite EU destination for Americans, and there is no timeline on lifting the limits in travel there, and we could see the situation for European banking getting very bad.
Very quickly, we are seeing the situation in Europe, which was not great before this, getting dire.
Ultimately, it will reveal itself in the numbers.
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It is said that when the US sneezes everyone else cathces pneumonia.
Is there a similar saying for Europe?
I am not sure if there is a saying like that in Europe but this one, is not the doing of the U.S.
The European banking system was forced to do bail ins during the last crisis since nobody wanted to assume anyone's debt. This means that the banks are severely under capitalized. They simply are not in a position to weather a breakdown of the economy.
The EU is coming apart at the seams and their quest to be a major player on a global scale is failing. They might be 4th in order of importance behind the US, China, and maybe even Japan.
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