Europe's banks could take a $947 billion hit in a post-pandemic worst-case scenario, consultancy Oliver Wyman says

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European banks are set to face credit losses of as much as 800 billion euros ($947 billion) in the next three years in a worst-case scenario, according to an Oliver Wyman report. In case the region is not hit by a second COVID-19 wave, a sharp rise in unsecured loan losses might still cost banks in Europe about 400 billion euros ($473 billion), the report said. "The pandemic is unlikely to cripple the European banking sector, however many banks will be pushed into a 'limbo state', with very weak returns," said Oliver Wyman's co-head of EMEA financial services. Visit Business Insider's homepage for more stories.

The effects of COVID-19 are yet to fully unravel for the European banking landscape.

The pandemic's impact is here to stay and will have far-reaching repercussions for European banks, according to a recent report by consultancy firm Oliver Wyman. 

Banks in Europe can expect to face credit losses — bad loans that are unlikely to be recovered — of as much as 800 billion euros ($947 billion) in an adverse case scenario, the report said. 

Despite the huge figure, the report said these credit losses are "manageable" as the amount would be less than 40% of those experienced in the aftermath of both the global financial crisis and the 2012-2014 Eurozone crisis.

In a base case, banks can expect credit losses of around 400 billion euros ($473 billion), about 2.5 times the level seen in the previous three years — a period of relatively lower losses.

If the banks were to face the worst, the non-performing loan ratio would rise to 10%, which would represent a drag on bank profitability.

"The pandemic is unlikely to cripple the European banking sector, however many banks will be pushed into a 'limbo state,' with very weak returns," said Christian Edelmann, co-head of Oliver Wyman's EMEA financial services.

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COVID-19 has hit the retail and service business of many European banks as shown by their second-quarter earnings this week.

Barclays net profits plunged 66% and the Swiss bank set aside $4.7 billion as provision for coronavirus-related losses, Deutsche Bank's net income fell short of analyst expectations, and Credit Suisse overhauled a major part of its business structure with effect from August 1.

"Banks will need to intensify their cost-cutting efforts and manage credit losses carefully, but it is not currently likely that the industry will need radical restructuring as in the global financial crisis," said David Gillespie, UK & Ireland head at the consultancy.

However, the report suggests that circumstances could be worse as the banking sector has been helped out by government support schemes.

Investment banks have stood to gain from helping companies to raise trillions of debt during the pandemic so far. 

The report suggested that the rise of neobanks, that make use of a digital-first approach, is helping streamline processes and significantly cut down on costs incurred by incumbent banks.

"Business lines will need to work far more closely with technology teams and execute a major simplification of products and processes," the report said.

"Without this, the automation of back office tasks and decommissioning of systems that actually release value will not be possible."

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