That’s as measured by European banks’ coverage ratios, or loan loss provisioning.
KBW analysts led by Andrew Stimpson and Antonio Ramirez provide an interesting chart on the measure in a research note out on Monday. In this case, coverage ratios are loan loss reserves divided by non-performing loans [NPLs] — so basically how much the bank has covered its bad debts.
The chart shows the difference between European banks’ Q1 and Q2 2009 coverage ratios, by bank. And, as you can see, there’s a rather wide spectrum.
The not-so-subtle subtext here is that some banks may be helping their results along at the expense of provisioning for their bad debts.
Here’s the analysts’ comment:We had been skeptical of giving credit to banks that beat [loan loss charge] estimates, but only at the expense of poorer coverage reserves. While not always appreciated, this was a major black mark on an otherwise decent 1Q09 reporting season.
This trend has partly halted (at least at the sector level), and the decline in coverage ratios slowed in 2Q09. At bank level, there are outliers at either end of the spectrum (Danske built reserves by 6pp in 2Q09, while Postbank saw a large 17pp drop).
* More NPLs are property backed, with collateral making up a greater share of the NPL, meaning coverage ratios will intentionally fall
* Banks are spreading provisions over several quarters. This is not good as it means there is a natural delay to provisions and we will see an acceleration in future quarters as banks catch up with provisions from earlier NPLs.
Even more interesting is this tidbit from the analysts: if you keep the coverage ratio flat for the second-quarter, banks like Danske and Commerzbank would have reported higher profit before tax. However, most other banks (the ones that on the right-hand side of the above chart) would have reported slightly lower profits. In fact, overall, the banks would have made a 0.8 per cent return on risk-weighted assets (RoRWA) vs the 1.1 per cent they actually reported.
Four banks — ERG Eurobank, BPM, Raffeisen and Millennium — would have reported a Q2 loss. Chart below.
