Fed stress tests predict that HSBC and Santander will have the biggest loss rates of any large bank in the US market across credit cards and consumer lending
Fed stress tests predict that HSBC and Santander will have the biggest loss rates of any large bank in the US market across credit cards and consumer lending © Bloomberg

The Federal Reserve expects European banks to post the sharpest losses in key sectors hit by the pandemic, adding further pressure on their US operations which already have mixed shareholder support. 

The latest round of the Fed’s annual stress tests predict that HSBC and Santander will have the biggest loss rates of any large bank in the US market across credit cards and consumer lending.

Credit Suisse and Barclays post the highest loan loss rates in two other categories: commercial real estate and commercial loans. The impact was less material for them due to the small loan books in those areas, but the result still highlights the Fed’s view on their lending risk.

The tests also show that Deutsche Bank is still expected to burn through capital faster than any of the other 32 financial institutions whose performance the Fed modelled in a fictional crash from the start of the year to the first quarter of 2022.

European banks have long had a troubled history in the US, growing aggressively from the late 1990s before pulling back after sizeable losses. HSBC is considering even sharper cuts than the 30 per cent reduction announced earlier this year. 

Deutsche says it remains committed to a US business which does not yet earn its cost of capital, but shareholders and analysts remain sceptical. Credit Suisse’s US business has already shrunk significantly, while Santander has been trying to revive performance at what was for years its worst-performing unit.

“The problem is that the US banks are stronger and know their home market better,” said David Herro, vice-chairman of Harris Associates, which has $76bn of assets under management and owns significant stakes in European lenders including Credit Suisse and BNP Paribas.

“You should be more involved in areas when you have history and expertise. Any European banks still running operations where they don’t have a strong advantage, that is a business they shouldn’t be in,” he said.

In the latest review, the Fed said HSBC’s US credit card business would suffer losses of 26.4 per cent of its total loan balance in the crisis, the highest loss rate of the 33 banks analysed. The bank said in value terms it was only $400m and declined to comment further. HSBC’s total loan losses in the modelled crash came out at $3.9bn.

The potential hit to Santander’s consumer loan book was estimated at 17.3 per cent of the portfolio — the highest in that category — or $6.5bn. Loan losses across Santander’s entire US book came in at $8.6bn.

An S&P report singled out Santander and HSBC as two of the European banks where the loan loss assumptions were most damaging.

Stuart Plesser, banks analyst at S&P, said Santander’s performance likely reflected the fact that it tended to lend to borrowers with lower credit scores.

Deutsche is predicted to burn through 780 basis points of high quality equity during the Fed’s simulated crisis, 140bp more than the second most affected bank, Goldman Sachs.

Ana Arsov, banks analyst at Moody’s, said that while there was “no common theme in some of the foreign banks apparent under performance in select asset categories” the outcome would lead to them retaining “their high capital buffers in the US rather than returning capital to parents”. 

Deutsche had high quality equity totalling 26.2 per cent of its risk weighed assets at its US entity by the end of 2019. Credit Suisse had a common equity tier one ratio of 24.7 per cent. HSBC and Santander were closer to the US norms, with 13 per cent and 14.6 per cent respectively.

Deutsche, Barclays and HSBC all declined to comment on their performance in the exercise. Santander said most of its consumer losses were from its subprime car finance business, and that the stress tests proved its US division was “extremely well capitalised” with capital ratios in the top quartile. Santander’s US pre-tax profit jumped 46 per cent in the first quarter, the bank added.

Credit Suisse said its overall loan loss rate, of 0.9 per cent, was the best of the banks and that the impact of its 20.9 per cent loss rate in commercial real estate was “marginal” since that loan book is small.

HSBC North America’s total loan book, on a risk weighted basis, was almost $129bn at the beginning of the stress tests, while Santander USA’s was almost $119bn. Barclays US was $89bn, Credit Suisse was $62bn and Deutsche was under $37bn. All are far smaller than the US banks — Bank of America and JPMorgan’s assets, as weighted by risk, were around $1.5tn. 

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