Analysis: Banks face reversal of fortune from war and ‘great depression’

div classBodysc17zpet90 cdBBJodivpBy Sinead Cruise and John ODonnellp

pLONDONBERLIN Reuters – Global banks are taking steps to weather the wider impact of war and runaway inflation as the stream of central bank money that kept them afloat for more than a decade is switched off.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pBut if policymakers are hoping banks will help avert recession by turning on their own lending taps, they could be disappointed, bankers, analysts and investors told Reuters.p

pBanks are having to quickly get to grips with a sharp rise in the risk of doing business as corporate and retail borrowers juggle higher loan costs with soaring costs.p

pMeanwhile, Russia‘s invasion of Ukraine has pushed Europe to the brink of recession and triggered losses for banks including France’s Societe Generale and Austrias Raiffeisen.p

pFrench bank Credit Agricole and Italys UniCredit have also provisioned against warrelated losses but the effects, while felt most strongly in Europe, are rippling around the globe.p

p“The war, and its impact on price inflation, is a game changer,” Carsten Brzeski, an economist at Dutch bank ING, said, adding: “Consumers will take years to recover their spending power, lost to inflation. And companies will be hit as well”.p

pWhat is troubling some investors is that cracks are already starting to show in bank balance sheets, with results showing the capital cushions of JP Morgan, Barclays, HSBC, Morgan Stanley, Bank of America, Credit Suisse and Citi all dwindled in the first three months of 2022.p

pA protracted end to a 40year bull run in bonds has sparked painful losses for many banks, while others are also racking up problem debts after pandemic lockdowns which crippled global trade and shuttered thousands of businesses worldwide.p

pSome banks have scrapped plans to buy back cheaplyvalued stock in view of their capital slippage, despite posting healthy investment banking profits helped by volatile financial markets.p

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

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

pLOSING INTERESTp

pWhile rising interest rates should in theory be good news for banks, who can normally increase their margins and therefore their profits, the situation is not so clearcut in 2022.p

pThe Federal Reserve‘s historic 50 basis point bp rate hike on Wednesday signalled that the world’s biggest economy is more worried about inflation than stalling growth.p

pAnd in Europe, borrowing costs are moving in a similar direction. The European Central Bank could raise interest rates as soon as July, sources told Reuters, while the Bank of England hiked rates by 25 bps to 1 on Thursday and warned that Britain risked a doublewhammy of recession and inflation above 10.p

pRising rates may help some lenders cash in on hedges taken to offset bond market falls but they are also forcing banks to tighten their affordability checks, with many customers set to struggle with repayments on loans, credit cards and mortgages.p

pLast month, JP Morgan Chief Executive Jamie Dimon warned of the economic fallout from war and soaring inflation, after firstquarter profits at the largest U.S. bank slumped.p

pJPMorgan is seen as a bellwether for the U.S. economy and its results bode ill for banks worldwide.p

p“The recessions of the 1980s and 1990s followed a similar pick up in inflation to that being experienced today,” said Keith Wade, Chief Economist and Strategist at Schroders.p

pGREAT DEPRESSIONp

pThe European Commission has predicted that the economy of the 19member euro zone will shrink by a record 7.7 this year, a slump that Europes economy commissioner Paolo Gentiloni said had not been seen since the Great Depression.p

pThat scenario is largely driven by the shock of the biggest assault on a European state since World War II and the harm caused to economic engines like Germany, which relies on Russian oil and gas for its energy needs.p

pThe EU on Wednesday proposed its toughest sanctions yet against Russia, including a phased oil embargo that may spell fresh troubles both for borrowers and banks.p

pConsultancy EY this week forecast 3.4 of European loans would go unpaid this year, rising again in 2023. That is far higher than the 2.4 recorded last year, albeit below the levels of default seen in the aftermath of the eurozone debt crisis.p

pEY also predicted that lending growth would slow in general.p

pRestructuring firm Begbies Traynor also forecasts bleak times ahead, after reporting a 19 yearonyear increase in British firms in critical financial distress in the first quarter, as COVID relief measures tail off and costs spiral.