F.2021 will be the year of truth for German banks. So far, they have cope with the consequences of the corona pandemic reasonably well. But the longer the crisis lasts, the deeper the holes are tearing rising loan defaults in the balance sheets. According to experts, savings banks and Volksbanks in particular have to be prepared for severe impacts. “2021 could turn out to be the toughest test for banks since the global financial crisis,” says analyst Gavin Gunning from the rating agency S&P Global. Financial regulators warn that not all banks will weather the storm.
According to Christoph Schalast, Professor of Business Law at the Frankfurt School, the holdings of loans at risk of default across Europe will double to around 800 billion euros next year. The German banks will not be spared from this either, although they have few bad loans on their books compared to other European countries. Bundesbank board member Joachim Wuermeling calculates that the loan defaults of the German banks will quadruple to 0.8 percent of the loan portfolio and the burdens are likely to add up to around 13 billion euros. ECB chief banking supervisor Andrea Enria therefore advised the financial institutions to prepare for the worst.
With huge sums of money, the federal government supports companies that have lost sales due to the restrictions as a result of the corona pandemic. If you add up all the aid, you get more than a trillion euros. But not only Deutsche Bank boss Christian Sewing warns of “zombie companies” that are only artificially kept alive because the obligation to file for bankruptcy has been partially suspended since March. This should come into force again from January 1st. The Bundesbank therefore warns that bankruptcies in Germany could rise to over 6,000 per quarter in early 2021.
Bayern-LB chief economist Jürgen Michels expects “a 20 to 30 percent increase” in bankruptcies for the whole year. Patrik-Ludwig Hantzsch, Head of Economic Research at Creditreform’s credit agency, forecasts 24,000 bankruptcies after around 16,000 this year. According to a survey by the German Chamber of Commerce and Industry, every eleventh company feels threatened with insolvency.
The head of the financial supervisory authority BaFin, Felix Hufeld, raises the worry lines on the forehead. He believes that banks will be hit by several waves of credit defaults. “We haven’t seen the big end yet. That is still to come. ”Although banks have generally been better equipped with capital since the financial crisis twelve years ago, some institutions will still not survive the current crisis.
According to a study by the management consultancy Bearingpoint, risk provisioning by European banks tripled to a good 60 billion euros in the first half of the year, and even quadrupled in Germany. In the summer, however, the outlook was a little better and the economic climate has clouded over again since then. “The second wave will be an enormous test for the financial sector,” says Tim Jennison, partner at BCG. The banking industry is already under pressure from years of low interest rates and tough competition. “It’s not nice if a tire bursts when the engine stutters,” says Wuermeling.
Is the credit crunch coming?
According to finance professor Martin Faust from the Frankfurt School, the problem is not only the increase in bad loans, but also a general deterioration in the creditworthiness of companies. In such a case, banks have to deposit more equity capital. “The question is how bad things are for the companies and what about the whole middle class. This means that there is a risk that Volksbanks and savings banks will be more affected than the large private institutions, ”says Faust. Because houses like Deutsche Bank benefit – at least for now – from a flourishing capital market business. Sewing had already admitted that growth in investment banking in 2021 should not be as high as this year.
Politicians and regulators are watching closely how the situation is developing for the banks. The financial institutions should not turn off the credit faucet for the companies and have therefore come to meet the banks with a whole series of reliefs. At the same time, however, they want to prevent the institutes from continuing to provide companies with loans that are not viable in the long term. “We are currently not seeing a credit crunch, but it could very well loom in 2021,” warns Professor Schalast.