Sinead cruise and John O’Donnell

LONDON/BERLIN, (Reuters) – Global banks have taken steps to weather both the larger impact of war and inflation. The stream of central bank cash that has kept them afloat over a decade now is off.

Bankers, analysts, and investors said that policymakers may be disappointed if they expect banks to help them avoid recession by turning off their own borrowing taps.

As retail and corporate borrowers face rising loan costs, banks are being forced to rapidly address the increased risk to do business.

Russia’s invasion in Ukraine, however, has brought Europe to the edge of recession. It also caused losses at banks like Societe Generale of France (OTC:), and Raiffeisen of Austria.

French bank Credit Agricole (OTC) and Italy’s UniCredit both have provisions for war-related loss. The effects are felt more strongly in Europe than they are elsewhere, but there is no denying that the ripple effect of these losses can be felt all over the globe.

Carsten Brzeski from Dutch bank ING stated that “the war” and the impact it has on inflation was a “game changer.” He added, “Consumers will need years to recover lost purchasing power due to inflation. Businesses will suffer as well.

Investors should be concerned that there are cracks in the bank balance sheets. These results show JP Morgan’s capital cushion. Barclays (LON:), HSBC, Morgan Stanley Bank of America (NYSE :), Credit Suisse Citi (SIX) and Citi were all down in the first three month of 2022.

Many banks have suffered heavy losses after a long-running bull market in bonds for 40 years. Others are also facing problem debts from pandemic lockdowns that crippled international trade and shut down thousands of companies worldwide.

Some banks are now refusing to purchase stock at low prices due to capital slippage. However, they have made healthy investments banking profits that were helped by volatility in the financial market.

Barrington Pitt Miller is chief investment officer at Wykeham Overseas advisors. “We had expected massive buybacks, then suddenly they were cancelled or moderated.”

He stated, “People assumed that big banks held large excess capital positions…that dynamic is now in shreds.”

LOSE INTEREST

Although rising interest rates are good news in theory for banks as they can increase their margins, and thus their profits, it is less clear in 2022.

Federal Reserve announced Wednesday’s 50-basis point (bp), historic rate increase, signaling that the largest economy in the world is worried more about inflation and stalling growth.

In Europe, the trend is similar in terms of borrowing costs. Sources told Reuters that the European Central Bank may raise interest rates in July. Meanwhile, on Thursday, the Bank of England raised rates 25 bps at 1% and warned Britain of a double-whammy of inflation exceeding 10% and recession.

Although rising rates can help some lenders make money on bonds market losses hedges, they also force banks to increase their affordability standards, as many people will struggle to pay back mortgages, credit cards or loans.

Jamie Dimon, Chief Executive of JP Morgan, warned last month about the economic consequences from war and rising inflation after the first quarter profits slumped at the biggest U.S. Bank.

JPMorgan (NYSE 🙂 is a symbol of the U.S. economic strength and bodes ill for all banks.

Keith Wade, chief economist and strategist at the Institute for Economic Research stated that “the recessions in 1980s and 1990s were accompanied by a similar rise in inflation as today.” Schroders (LON:).

GREAT DEPRESSION

According to the European Commission, the eurozone’s 19 members will see their economy shrink by 7.7% in 2012. This is a record slump Europe’s economic commissioner Paolo Gentiloni stated was unprecedented since the Great Depression.

This is due to the impact of Russia’s largest attack on an European state since World War II, and the damage caused economic engines such as Germany. Germany relies heavily on Russian oil for its energy requirements.

Wednesday’s EU sanctions on Russia were toughest yet, with a phased embargo and oil embargo. These could cause new problems for banks as well as borrowers.

This week, Consultancy EY predicted that 3.4% European loans would remain unpaid by the end of this year. It is expected to rise again by 2023. This is a far greater figure than the 2.4% that was recorded in 2017, but it’s still lower than what we saw after the eurozone debt crisis.

EY predicted, too that lending growth will slow overall.

Begbies Traynor is also predicting bleak times in the future after reporting that there was a 19% rise in British businesses in crisis financial distress over the past quarter. COVID relief programs have ceased and costs are spiraling.

T. Rowe Price fund manager Ken Orchard stated that rising rates could provide an opportunity for lending, but now is not the time to “add credit” in light of conflicts in Ukraine and poor prospects for Chinese economic growth.