DNBulletin: Banks must recognise payment problems caused by the economic crisis at an early stage
Against the background of the current economic crisis, banks need to identify their customers' payment problems in good time and adapt their provisioning policy accordingly. This is evident from a survey by De Nederlandsche Bank (DNB) on the occasion of the regular press conference on current developments in supervision.
The current economic crisis is not caused by imbalances in the financial sector. In that respect, this crisis differs from the financial crisis we had more than a decade ago. Governments have taken many relief measures that help to absorb the initial shock. However, the measures also delay the full impact of the economic crisis on banks. For example, for part of their loan books, banks have accepted that payments were temporarily suspended. A large number of customers are able to repay their loans in the end. Banks must therefore focus on timely recognising , and possibly also on adjusting their provisioning policies.
Banks entered this crisis better capitalised
Due to the higher capital requirements imposed in recent years, banks entered the coronavirus crisis better capitalised than the financial crisis of 2008/2009. As a result, this time banks have been better able to continue to support the economy. In addition, policy makers, including DNB, have taken measures in response to the coronavirus outbreak, giving banks more leeway to maintain lending to businesses and households. In addition, banks have responded to the urgent calls of the ECB and DNB not to pay dividends and not to buy back shares in 2020. For all banks under ECB supervision, including the Dutch large banks, this has kept some EUR 27.5 billion of capital in the sector.
Range of measures taken to reduce the impact of the coronavirus crisis
There have also been measures taken impacting loans on bank balance sheets. For example, the government has set up guarantee schemes that reduce banks’ risk on new loans they provide (see also Figure 1a) and banks’ customers have received direct financial support from the government. In addition, banks have issued payment deferrals (also known as moratoria), which temporarily allow customers not to pay interest and/or repayments on their loan. This gave customers time to identify the direct effects of the lockdown on their businesses, without risking being registered as defaulters.
No major payment problems for the moment
In total, Dutch banks currently have almost EUR 1,900 billion in loans outstanding. For the vast majority of these loans – some 96% – banks expect customers to be able to meet their payment obligations (see also Figure 2). For over EUR 50 billion of these loans, Dutch banks have granted payment deferrals (see also Figure 1b). Deferred payments total more than EUR 3 billion, representing around 1.8% of banks’ core capital. As moratoria expire, these customers will have to pay the interest and/or resume repayments on the loan, of course. It will have to be assessed whether they are able to do so. Banks expect that a large proportion of these customers, some 69%, will be able to repay their loans, while less than 2% will not. For 29% of customers there are no payment problems at the moment, but banks do take into account higher credit losses in this category in the future (see also Figure 2).
Banks increase provisions
Banks can prepare for higher losses in the future by making provisions. They have already made considerable provisions since the beginning of the coronavirus crisis, although a flattening has recently been observed (see also Figure 3). The increase in provisions is also evident from the amount of provisions relative to the level of non-performing loans (i.e. the NPL coverage ratio, see also Figure 3).
Figure 3. Provisions (left axis) and NPL coverage ratio (right axis)
Source: DNB
Left axis: Provisions made by Dutch banks for loans with (risk of) repayment problems. Right axis: Ratio of provisions relative to the value of loans with repayment problems.
More commitment needed to recognise payment problems in time
The package of support measures has given some relief in uncertain times, but they also delay the materialisation of risks. Similarly, the ECB expects that the maximum impact on banks’ capital in the euro area will not be felt until 2022. We will therefore continue to monitor carefully whether banks recognise payment problems at customers in good time. It is also important that banks review their total loan book, and in particular the loans on which moratoria have been granted, to assess whether they include loans that are unlikely or less likely to be repaid. One lesson from the financial crisis is that the slow recognition and handling of high numbers of loans with payment problems ultimately hinders economic recovery. Despite the operational challenges involved, it is therefore important that banks recognise these risks and vulnerabilities in time and focus on prudent risk management. Management strategies such as loan restructuring and write-downs should be used where necessary, taking account of the customer's interests. The fact that provisions are already growing is an indication that banks expect credit risks to increase. This development, combined with structurally low profitability, partly caused by low interest rates, is a challenge for banks. We strongly encourage banks to adopt a prudent provisioning policy at these times and urge them to continue to pursue them in the coming period.
