Fortunately, there are no new suspected corona cases at the conference, but the efforts to prevent epidemics show that the epidemic has finally reached Europe’s financial scene. The uncertainty is great. Currently nobody knows how far the corona virus spreads, how dangerous it is and what damage the pathogen will cause to the markets and the economy, warns Deutsche Bank CFO James von Moltke.
“Obviously, many people underestimated the impact a few weeks ago,” says the banker. The economists of the German bank initially predicted that global economic growth would likely be depressed by 0.1 to 0.2 percentage points. Now it is clear to everyone that the consequences could be more serious. “But no one can say what the impact on supply chains, production, consumption and the economy will be.”
ECB Director Isabel Schnabel is also alarmed: “We are all very concerned about what is currently happening with the spread of the corona virus,” she said in London on Thursday. If the virus became more prevalent in Europe, the central bank could not ignore it. The uncertainty is increasing significantly. That applies to the global growth prospects, “but of course also to the prospects for the euro zone.”
Another European financial center is already showing more concrete consequences of Corona for the banking industry: “The outbreak of the novel corona virus has unpredictable human and economic consequences,” warns Bill Winters, CEO of the major London bank Standard Chartered, Winters blames the epidemic for ensuring that his bank will fail to meet its target of returning 10 percent on equity in 2021.
Standard Chartered has its headquarters in the British capital, but achieves similarly to its larger competitor HSBC much of its profits in the emerging markets, especially in Asia. That is why both banks are particularly affected by the corona virus.
But the deeply unsettled bankers at the Frankfurt financial conference are clear evidence that the health crisis is also a threat to other European banks. Investors are worried about Italian money houses because the country has the most cases of illness in Europe and because several cities in the economically prosperous north have had to be sealed off from the outside world.
The German banks are also not spared: The violent “price losses in recent days show that the Corona markets are also a risk for Deutsche Bank and for Commerzbank see, ”says Philipp Häßler, analyst at the broker Pareto Securities.
Focus on operational safety
The corona crisis has two critical aspects for financial institutions. On the one hand, the consequences of the epidemic threaten considerable economic damage. For the banks, however, the immediate question is how they can continue to operate if the virus spreads, and also to keep vital functions such as payment transactions running for economies, possibly in adverse circumstances.
This has been an issue in Asia for weeks. Uwe Fröhlich, co-head of DZ Bank, reported how to safeguard the business operations of a bank in times of the virus in the Hong Kong branch. The approximately 70 employees there worked half from home and half in the office. Commerzbank and Deutsche Bank are trying to use similar strategies in Hong Kong and Singapore to ensure that operations continue to run smoothly. The employees are spread over several locations, personal meetings are prohibited, be it professional or private.
Corona disease has already occurred at Deutsche Bank in Singapore. Thanks to the measures that were introduced immediately, the bank said there were no further infections. The affected employee is now well again.
After the new cases of infection in Germany and the warning from Health Minister Jens Spahn of an epidemic, operational security is quickly becoming more important for banks in Germany as well. As of now, there are no plans to implement similar measures as in Asia at the headquarters in Frankfurt, according to Deutsche Bank. But the situation is constantly monitored and all measures, including travel bans and restrictions, will be adapted to the changing situation.
The issue of operational security is also a concern for European financial supervisors. They regularly check whether the banks have made sufficient preparations for crisis situations. This includes, for example, that institutes have alternative quarters that are ready for immediate use. They also have to ensure that employees work from home and can keep all important areas such as payment transactions running from there. In an emergency, this must not only work for a few days, but also over a longer period.
The topic is dealt with in the financial regulations under the generic term “Business Continuity Planning” and is part of the risk management of the financial institutions. So far, the financial regulator has no evidence that German banks have had major problems in this area because of Corona. According to a German financial institution, the authorities are kept up to date on current developments and all planned measures.
Banks affected worldwide
Banks have been running contingency plans on Wall Street for days. It is particularly critical that securities trading can continue even in the event of a possible pandemic. The area is particularly problematic for the large US houses because it cannot be relocated to the home office.
Typically, the employees in the trading rooms sit side by side, now the US banks are considering whether they can increase the distance between the desks and which teams should be separated to minimize the risk of infection. In addition, parts of the securities trading could be relocated to other countries if necessary, according to a large Wall Street house.
The US regulators have already warned that the institutes will have to do without up to 40 percent of their staff in the event of a serious pandemic.
At least in Asia, the big banks are already calculating the concrete economic consequences of the corona crisis. Depending on the probability of default, the financial institutions have to reserve capital for the loans granted. If the virus slows down the economy, the risk of default on the loans increases and the institutions have to put more funds into risk provisioning. This affects capital ratios and results. If the epidemic continues into the second half of the year, HSBC expects up to $ 600 million in additional burdens on the lending business.
The potential damage for the European markets is much more difficult to calculate. “At the moment, it’s like looking into a crystal ball,” says a top banker from Frankfurt. Most of his colleagues hope that Corona will end up following a similar pattern to other epidemics.
“Typically, economic activity increases quickly after a serious epidemic has subsided and there are even catch-up effects that can compensate for the economic downturn during the wave of illnesses,” said Commerzbank economists. Mark Wall, chief economist at Deutsche Bank for Europe, has a similar view, but with “considerable uncertainty” and on the condition that there is no major corona outbreak in Europe.
Loan loss provisions could increase
“If the disease spreads further and Europe slips into recession, the banks would have problems,” warns analyst Häßler. The greatest effect would probably be the higher loan loss provisions for loans at risk of default. “The Italian banks could face a special burden because they are already pushing a large portfolio of bad loans in front of them,” predicts the expert.
In autumn of last year, according to data from the European Central Bank (ECB), 7.3 percent of all loans granted by Italian banks were at risk of default, an average of just 3.4 percent across the EU.
“No comment,” says the two large banks Intesa Sanpaolo and Unicredit when asked whether they now need to change their return targets. It is too early for an assessment, says a Unicredit spokeswoman. “If the economy is not doing well, the banks will also suffer,” says financial expert Fabrizio Pagani from asset manager Muzinich & Co. The effects of the virus on all areas of public life in Italy, from production to export to tourism, are too great.
Italy’s banking system is suffering from chronically weak yields anyway. The International Monetary Fund (IMF) recently put its finger in the wound: Although the situation has recently improved, small and medium-sized banks in particular continued to suffer from the weak profitability, according to the IMF’s country report.
Yield prospects are clouding over
In Germany, the big banks are also struggling with weak prospects for returns. Analyst Häßler fears that the situation could be exacerbated by Corona: Due to the robust economy, many domestic financial institutions have historically had to save little money for bad loans in recent years. “This provision could increase significantly in the event of a recession,” says the analyst.
There is also a second effect. The margins of financial institutions could come under even greater pressure if the corona crisis forces the ECB to loosen its already extremely expansionary monetary policy even further. It can be seen from the money market that the vast majority of investors now assume that the central bank will further tighten its penalty rates for banks by December.
The price reactions on the stock market show how great the fear is that the corona crisis will leave significant traces in the balance sheets of European and German banks. At the beginning of the year, the shares of Deutsche Bank and Commerzbank recovered significantly. Since the corona virus has spread beyond China, this development has reversed.
Deutsche Bank and Commerzbank shares have both lost 18 percent since their high in mid-February. As a result, bank values fell even more than the overall market. “Commerzbank and Deutsche Bank are in the midst of a painful renovation, the plans are sewn on the edge, and major setbacks can hardly be afforded,” says a competitor’s board.
The question of how violently Corona will burden the German economy and domestic banks should also play an important role on Friday when Bundesbank President Jens Weidmann presents the Federal Reserve’s balance sheet for 2019. For security reasons, the Bundesbank is asking all journalists who have been in the regions of Asia or Europe that are at risk of corona in the past few weeks not to follow the press conference live on site, but via stream on the Internet.
But the insidious virus not only affects the large Frankfurt financial world, it has long since reached the province: The Taunussparkasse asks all of its customers for understanding that the employees will refrain from the usual handshake until further notice. Instead, the advisors would greet their guests with a friendly – and not infectious – smile.
Assistance: Elisabeth Atzler, Astrid Dörner
More: In the event of a recession, Deutsche Bank and Commerzbank would be particularly hard hit.