A world health crisis is a good opportunity to bury bad news. You can use the pandemic to hide better tidings too if you are Machiavellian. Banco Santander and Barclays have shown how to do both in a peak week for coronavirus-inflected European bank earnings.
They are an odd couple: a Spanish lender with a Latin American bias and a British bank wedded to unfashionable investment banking. The pair have made unexpectedly large pandemic-related write-offs for the first half of the year. At Santander, the total is an incredible €19.6bn. Barclays took a charge of £3.7bn. Shares in both fell 3.5 per cent in morning trading.
Similarities end there. Within Santander’s mega-write-off lurks implicit admission that its UK strategy has disappointed badly. The parent has written down the goodwill of Santander UK by €6.1bn. That leaves a business valued at €8.4bn in 2017 worth around €1bn in goodwill now.
Covid-19 cannot be solely blamed. Santander UK, created through the acquisition of former building societies in the noughties, has failed to join the top tier of the UK’s retail banking oligopoly. It is overexposed to mortgages. A London listing, if it ever comes, would now be a muted affair.
To be fair, Lex likes Santander’s exposure to erratic but vigorous Latin America. The UK now looks like an irrelevance.
The bank’s €12.6bn in goodwill and tax asset impairments do not damage capital, despite propelling Santander to a €6.4bn pre-tax loss. A loan loss provision of €7bn is equivalent to 1.5 per cent of the credit portfolio on an annualised basis. That actually leaves core equity tier one capital, an important measure of financial strength, slightly higher at 11.8%.
Barclays also raised core capital. But its coronavirus-related write-offs dampen exuberance over a strategy success, rather than a flop. Profits before provisions were a third higher at £5bn as trading surged in rates, bonds and stocks. This makes it a good time to take a fat loan loss provision. Writebacks may later support dividends. Impairments were equivalent to 1.7 per cent of loans, even after deducting a steep loss on a single borrower, possibly Wirecard.
Accounting rules require bank bosses to prophesy the impact of Covid-19. But they are not epidemiologists. Impairments will instead point to the failure or success of judgments which they can be held responsible for.
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