European Banks Face 29% Profit Decline Amid US Trade Tensions

European banks are facing significant challenges due to escalating trade tensions with the United States, according to a recent stress test conducted by S&P Global Ratings. The analysis reveals that the deterioration in corporate loan quality, driven by the trade conflict, will erode the earnings of several major banks in Europe. The stress test, which involved 91 banks, did not anticipate any annual losses for these institutions. However, the overall financial health of these banks is likely to be compromised due to the increased risk and uncertainty in the market.

The trade tensions are expected to lead to a decline in lending activities and an increase in non-performing loans, further straining the banks' profitability. The situation underscores the need for European banks to strengthen their risk management practices and diversify their revenue streams to mitigate the impact of trade-related disruptions. The stress test considered three hypothetical scenarios of escalating trade tensions. In the most severe scenario, the median decline in bank profits was projected to be 29%.

Five banks were identified as being particularly vulnerable: France's Credit Agricole and BPCE, Germany's Commerzbank, the Netherlands' Rabobank, and Denmark's DLR Kredit. These banks were highlighted due to their larger exposure to industries with higher loss rates, larger loan portfolios relative to total assets, lower expected profitability, and higher economic risk in their operating countries. The stress test results support the assessment that European banks have significantly enhanced their ability to withstand credit risk. This aligns with expectations that upcoming regulatory stress tests will yield similar conclusions.

European banks are expected to face increased scrutiny from regulators, who will determine the amount of capital banks need to hold as a safety buffer based on the stress test results. This, in turn, will affect the amount of funds available for dividend payments to investors. The European Banking Authority and the European Central Bank are scheduled to release their own review results in early August. The regulatory bodies will use the test results to determine how much capital banks should hold as a safety buffer, which will in turn affect the amount of funds available for dividend payments to investors.