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OPINION

Doubts grow over banks’ optimistic forecasts for credit losses

Banks are guiding to lower cost of risk in 2021, but government support and forbearance make the true state of their loan books hard to discern.

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At the start of February, Europe’s largest banks began to report their full-year 2020 results. With the half-way point of the first quarter of 2021 already looming, investors wanted to hear more about the outlook, particularly for credit costs.

Here is the good news: the executive summary from bank CEOs is that the worst is past. And the tantalizing possibility is that write-backs from conservative provisions taken in the first half of 2020 could nudge up reported profits in 2021.

José Antonio Alvarez, chief executive of Santander, says: “We expect this year the cost of risk to go down from the 128 basis points we had [in 2020] and start the convergence to 1%.”

That would be a return to pre-pandemic levels.

At BNP Paribas, cost of risk in 2020 rose to €5.7 billion, an increase of €2.5 billion from 2019. Compared with Santander, that €5.7 billion is a more modest 66bp of the loan book, with 16bp of that counting against still performing stage 1 or 2 loans.

The NPL peak may have been flattened and the worst may have passed.