Deutsche Bank has warned that its bad debt provisions will hit their highest level in more than a decade this quarter, as the coronavirus crisis leaves the global economy mired in recession.
Germany’s largest lender had forecast a provision of just € 506 million for bad debts in the first three months of the year, but warned on Wednesday that the figure would rise this quarter.
“We expect credit loss provisions to be around 800 million euros for this quarter,” CFO James von Moltke told analysts on Wednesday at Goldman Sachs’ European finance conference. .
Analysts were only expecting 630 million euros in provisions for the second quarter, and 800 million euros will be multiplied by five compared to a year ago.
Mr. von Moltke added that “we expect the second quarter to be the peak of loan loss provisioning for this year,” and that the situation will improve in the second half of the year.
Deutsche Bank shares rose 2.6% in the early afternoon in Frankfurt, close to the highest level since late February.
The optimism about loan losses reflected in Deutsche’s first-quarter allowance has caused some surprise among analysts given the economic damage caused by efforts to contain Covid-19. Compared to the size of their loan portfolios, only 10 of Europe’s 40 largest lenders have provisioned less than Deutsche, according to data from DBRS Morningstar.
Deutsche has argued that it is less exposed to credit card debt than many of its rivals and an early foreclosure in Germany, where state aid to stricken businesses is more generous than in many other countries, limit the damage to its loan portfolio.
“There is nothing that we have seen since [late April] it would change our outlook for the full year, ”von Moltke said on Wednesday, confirming Deutsche’s forecast that credit losses in 2020 will be between 35 and 45 basis points of its loan portfolio. This 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 have urged lenders at the start of the pandemic to take a long-term view and not be too “mechanistic”.
As a result, Deutsche reverted to a three-year average economic forecast in the first quarter to model likely loan losses, compared to its previous policy of using quarterly assumptions. This meant that the implicit impact on gross domestic product in Deutsche’s risk models was lower, inflicting less damage on borrowers.
Deutsche also announced on Wednesday a restructuring of parts of its private bank, its largest division in terms of revenue.
The company that serves private and business clients outside of Germany will be part of Deutsche’s wealth management division with the aim of eliminating parallel structures in the back office.