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Euro zone banks must brace for profit hit: ECB

FRANKFURT (Reuters) - Euro zone banks need to prepare for a rapid deterioration in their balance sheets and take decisive steps to restore profitability, European Central Bank supervisor Andrea Enria said on Thursday.

FILE PHOTO: The head quarter of the European central bank (ECB) is photographed during sunset in Frankfurt, Germany, April 22, 2020, as the spread of the coronavirus disease (COVID-19) continues. REUTERS/Kai Pfaffenbach

With the bloc suffering an unprecedented recession amid the pandemic, governments have jumped in to save borrowers with guarantees and loan moratoria, but some of these schemes could soon run out, which would quickly hit banking profits.

“It is time for banks to brace for the impact that will likely materialise as the system-wide moratoria are lifted,” Enria told an online conference.

As a first step, banks need to quickly recognise newly soured loans, setting aside risk provisions, to free their capacity to lend to viable firms.

“Postponing the adjustments won’t help banks to re-establish themselves as attractive investment opportunities,” Enria added.

The next step will be to improve profitability, which was already weak before the pandemic, Enria said, noting that consolidation may be needed in the crowded banking sector.

“Healthy levels of orderly market exits are a key ingredient for a swift and successful recovery,” he said.

But banks should not use the coronavirus crisis as an opportunity to question the international regulatory framework, Enria said, defending the so-called Basel III set of rules negotiated over years.

Although the ECB hinted that it may lift a moratorium on bank dividend payments after December, Enria expressed a more measured view on the subject than others.

“A clearer picture on the trajectory of asset quality will also be needed to inform our review of the recommendation to suspend dividend payments, which we will complete in December,” he said.

Reporting by Balazs Koranyi; Editing by Hugh Lawson

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