Analysis: Banks face reversal of fortunes from war and runaway inflation

  • A new era of rising rates renews focus on credit risk
  • Policymakers are running the gauntlet of recession to curb inflation
  • War and geopolitics threaten lasting economic pain

LONDON/BERLIN, May 6 (Reuters) – Global banks are taking steps to cope with the wider impact of war and runaway inflation as the flow of central bank money that has kept them afloat for more than a decade is cut.

But if policymakers hope banks will help stave off recession by turning on their own lending taps, they could be disappointed, bankers, analysts and investors told Reuters.

Banks are rapidly facing a sharp increase in the risk of doing business as businesses and individuals juggle higher lending costs and soaring costs. Read more

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Meanwhile, Russia’s invasion of Ukraine has pushed Europe to the brink of recession and caused losses for banks such as France’s Societe Generale and Austria’s Raiffeisen.

French bank Crédit Agricole and Italy’s UniCredit have also provisioned for war-related losses, but the effects, although felt most strongly in Europe, reverberate around the world.

“The war and its impact on price inflation are a game-changer,” said Carsten Brzeski, economist at Dutch bank ING, adding: “Consumers will take years to recover their purchasing power, lost due to the ‘inflation. And businesses will be hitting too’.

What worries some investors is that cracks are already beginning to appear in bank balance sheets, with results showing that the capital cushions of JP Morgan, Barclays, HSBC, Morgan Stanley, Bank of America, Credit Suisse and Citi have all decreased during the first three months. of 2022.

The protracted end of a 40-year bond bull run has caused painful losses for many banks, while others are also racking up problematic debt after pandemic lockdowns crippled global trade and shuttered thousands of banks. companies in the world.

Some banks shied away from buying cheap stocks due to capital slippage, despite strong profits in investment banking, helped by financial market volatility.

“We were expecting huge buybacks and then these were suddenly canceled or moderated,” said Barrington Pitt Miller, chief investment officer of Wykeham Overseas Advisors.

“People thought the big banks were sitting on huge excess capital positions…that dynamic is now in tatters,” he said.

If the rise in interest rates should in theory be good news for banks, which can normally increase their margins and therefore their profits, the situation is not as clear cut in 2022.

The Federal Reserve’s historic 50 basis point (bp) rate hike on Wednesday signaled that the world’s largest economy is more concerned about inflation than slowing growth. Read more

And in Europe, borrowing costs are moving in the same direction. The European Central Bank could raise interest rates as early as July, sources told Reuters, while the Bank of England raised rates by 25 basis points to 1% on Thursday and warned Britain risked a double blow of recession and inflation above 10%. Read more

Rising rates may help some lenders take advantage of hedging taken out to offset bond market falls, but they’re also forcing banks to tighten affordability controls, with many customers struggling with repayments of loans, cards credit and mortgages.

Last month, JP Morgan chief executive Jamie Dimon warned of the economic fallout from war and soaring inflation, after the largest US bank’s first-quarter profits fell.

JPMorgan is seen as a gauge of the US economy and its results bode ill for banks around the world.

“The recessions of the 1980s and 1990s followed a rebound in inflation similar to what we see today,” said Keith Wade, chief economist and strategist at Schroders.

The International Monetary Fund predicts eurozone growth will be just 2.8% this year, down from 5.3% in 2021, and growth is expected to moderate further to 2.3% in 2023.

The EU on Wednesday proposed its toughest sanctions yet against Russia, including a gradual oil embargo that could lead to further problems for borrowers and banks alike. Read more

The bloc’s foreign policy chief, Josep Borrell, said this week that EU countries were “almost there” to agree to a new sanctions package against Russia. Read more

Consultancy firm EY predicted this week that 3.4% of European loans would remain unpaid this year, and rise again in 2023. That is well above the 2.4% recorded last year, although below default levels observed in the aftermath of the eurozone debt crisis.

EY also predicted that loan growth would generally slow.

Restructuring firm Begbies Traynor also predicts bleak times ahead, after reporting a 19% year-on-year rise in critically financially distressed UK businesses in the first quarter as COVID relief measures falter and costs soar.

Ken Orchard, fund manager at T. Rowe Price, said that while rising rates normally provide an opportunity to lend, now was “not the right time to add credit” amid conflict in Ukraine and poor prospects for Chinese growth.

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Additional reporting by Megan Davies in New York; Editing by Alexander Smith

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