bank profits will remain low until 2022

LONDON – European banks will not see their profits return to pre-pandemic levels until 2022, the region’s central bank warned on Wednesday in its latest financial stability review.

Eurozone lenders have struggled to make significant profits in the last decade after the 2008 global financial crisis, with tighter regulatory control and low interest rates. However, the recent coronavirus-induced crisis has further worsened the results and this will continue to be felt over the coming months, according to the European Central Bank.

“Bank profitability is expected to remain weak,” Luis de Guindos, vice-president of the ECB, said in a statement Wednesday morning.

If a bank has consistently low profits, it could hamper its ability to lend money to businesses and individuals. The overall profitability of a banking system also reflects the health of that economy.

Market expectations point to an overall return on equity (ROE) – a measure of bank profitability – of 1.7% this year, followed by 3.1% and 5% in 2021 and 2022, respectively. The ROE of euro area banks stood at around 6% in June 2019, according to ECB data.

However, “with the recent upsurge in infections and new containment measures, it is likely that profitability forecasts will be revised downwards, as it is also uncertain when a vaccine will be available to a larger portion of the population. “, warned the ECB in its press release. report.

The coronavirus pandemic and subsequent stay-at-home orders have hurt economic activity, which in turn has constrained the financial system. Consumers and businesses are reluctant to incur large expenses during downturns and investment decisions are on hold.

Three pharmaceutical companies recently announced that their Covid-19 vaccines would be ready for distribution in the coming weeks. However, there is still some uncertainty about when vaccinations will begin, which parts of the population will get them first, and, more importantly, when economies return to normal activity levels.

“The continued weakness in profitability could hamper the ability of banks to support lending to the real economy in the months to come, especially as interest rates are expected to remain low for a substantial period to come,” said said the ECB in its review.

The banking system is seen as a key element in supporting economic recovery from the pandemic. Many companies will be looking for new funding to rebuild their work after months of stand-by.

However, interest rates – which are what banks charge for money lending – are expected to stay low as the ECB continues its ultra-loose monetary policy.

The pan-European Stoxx 600 banking index is down around 22% since the start of the year.

The ECB also identified vulnerabilities in the corporate sector and said that if governments lift budget support prematurely or wait too long to do so, it could create additional risks.

Other important institutions, such as the International Monetary Fund, have also warned against abruptly stopping fiscal stimulus measures.

Governments around the world have increased funding for businesses and individuals affected by the pandemic, but this aid has in turn pushed public debt levels to historic levels. Policymakers will need to seek a strict balance between providing aid and monitoring debt levels during the recovery phase.

In addition, the central bank also warned of a possible correction in the residential and commercial real estate markets.

While the real estate market has shown resilience in the current crisis due to low interest rates, “signs of overvaluation are increasingly visible for the euro area as a whole” and a fall “sharp and Sustained “activity is cause for concern, the ECB said in the report.