If a bank presents consistently low profits that could hurt its ability to lend money to businesses and individuals.
The coronavirus pandemic and the subsequent stay-at-home orders have dented economic activity, which has in turn limited the financial system.
The pan-European Stoxx 600 banking index is down about 22% since the start of the year.
A Eurosystem monetary authority sign stands outside the European Central Bank headquarters.
LONDON — European banks will not see profits return to pre-pandemic levels before 2022, the region’s central bank warned Wednesday in its latest financial stability review.
Lenders in the euro zone have struggled to make sizeable profits over the last decade following the 2008 global financial crisis, with stronger regulatory scrutiny and low interest rates. However, the recent coronavirus-induced crisis has worsened bottom lines further and that will continue to be felt over the coming months, according to the European Central Bank.
“Bank profitability is expected to remain weak,” Luis de Guindos, vice president at the ECB, said in a statement on Wednesday morning.
If a bank presents consistently low profits that could hurt its ability to lend money to businesses and individuals. A banking system’s overall profitability also reflects the health of that economy
Market expectations point to an overall return on equity (ROE) — a measure of banking profitability — of 1.7% this year, followed by 3.1% and 5% in 2021 and 2022, respectively. The ROE of euro area banks stood at around 6% in June of 2019, according to ECB data.
However, “with the recent resurgence in infections and new containment measures, it is likely that profitability forecasts will be revised downwards, as it is also uncertain when a vaccine will be available for a larger share of the population,” the ECB warned in its report.
The coronavirus pandemic and the subsequent stay-at-home orders have dented economic activity, which has in turn limited the financial system. Consumers and businesses become wary of taking on big expenses in a downturn and investment decisions are put on hold.
Three pharmaceutical companies have recently announced their Covid-19 vaccines will be ready for distribution in the coming weeks. However, there is still some uncertainty as to when vaccinations will start, which parts of the population will get it first and, more importantly, when economies will return to normal levels of activity.
“Ongoing weak profitability might hamper banks’ capacity to support lending to the real economy in the months ahead, not least as interest rates are expected to remain low for a substantial period to come,” the ECB said in its review.
The banking system is seen as a key element to support the economic recovery in the wake of the pandemic. Many businesses will be looking for new funding to rebuild their work after months of being on stand-by.
However, interest rates — which are what banks charge for lending money — are expected to remain low as the ECB continues with its ultra-loose monetary policy.
The pan-European Stoxx 600 banking index is down about 22% since the start of the year.
