Deutsche Bank warns bad loan provisions set to reach 11-year high


Deutsche Bank has warned its provisions for bad loans will surge to the highest level in more than a decade this quarter as the coronavirus crisis leaves the global economy mired in recession.

Germany’s biggest lender had earmarked a provision of just €506m for bad loans in the first three months of the year, but cautioned on Wednesday that the figure would increase this quarter.

“Our expectation would be that credit loss provisions will be in a range around €800m for this quarter,” James von Moltke, chief financial officer, told analysts on Wednesday at Goldman Sachs’ European Financials Conference.

Analysts were expecting just €630m in provisions for the second quarter, and €800m will be up fivefold from a year ago.

Mr von Moltke added that “we would expect that the second quarter will be the peak of the loan loss provisioning for this year”, and that the picture would improve in the second half of the year.

Shares in Deutsche Bank rose 2.6 per cent in early afternoon trading in Frankfurt to the highest level since late February.

The optimism reflected in Deutsche’s first-quarter provision caused some surprise among analysts given the economic damage wrought by efforts to contain Covid-19. Relative to the size of their loan book, only 10 of the 40 largest European lenders provisioned less than Deutsche, according to data by DBRS Morningstar.

Deutsche has argued that it is less exposed to credit card debt than many of its rivals and that an early lockdown in Germany, where state aid for stricken companies is more generous than in many other countries, will limit the damage to its loan book.

“There is nothing we have seen since [late April] that would change our outlook for the full year,” Mr von Moltke said on Wednesday, confirming Deutsche’s guidance that 2020 credit losses will range between 35 and 45 basis points of its loan book. That is up from 17 basis points last year.

In calculating their expected credit losses, banks have some leeway over the inputs they feed into their internal models. European regulators urged lenders at the onset of the pandemic to take a long-term view and not be too “mechanistic”.

As a result, Deutsche in the first quarter reverted to three-year average economic forecasts to model likely loan losses, compared with its previous policy of using quarterly assumptions. That meant that the implied hit to gross domestic product in Deutsche’s risk models was smaller, inflicting less damage on borrowers.