BELGIAN PRIME NEWS Quarterly publication Participating Primary and Recognised Dealers : Barclays, Belfius Bank, BNP Paribas Fortis, Citigroup, Crédit Agricole CIB, HSBC, KBC Bank, Morgan Stanley, Natixis, NatWest (RBS), Nomura, Société Générale Corporate & Investment Banking N° 89 September 2020 Last update : 29 September 2020 Next issue : January 2021 • MACROECONOMIC DEVELOPMENTS : Huge uncertainties are curbing the post-lockdown recovery • SPECIAL TOPIC : Belgian banking sector in good shape to cope with the crisis • FINANCIAL MARKETS AND INTEREST RATES : Sovereign bond yields remain low in an uncertain environment • TREASURY HIGHLIGHTS : Belgian Debt Agency’s funding programme proceeds smoothly CONSENSUS Average of participants’ forecasts Belgium Euro area 2019 2020p 2021p 2019 2020p 2021p Real GDP (1) 1.4 -7.9 5.8 1.2 -7.6 5.7 Inflation (HICP) (1) 1.2 0.5 1.3 1.2 0.3 1.0 General government balance (2) -1.9 -9.9 -5.4 -0.6 -9.2 -4.6 Public debt (2) 98.7 114.9 113.4 86.0 103.3 102.1 (1) Percentage changes. (2) EDP definition ; percentages of GDP. SUCCESSIVE FORECASTS FOR BELGIUM eal rot HICP inflation 8 3 6 4 2 2 0 −2 −4 1 −6 −8 −10 0 III III IV III III IV III III IV III III IV 2020 2021 2020 2021 For 2020 For 2021 Source : Belgian Prime News. www.nbb.be 1 MACROECONOMIC Huge uncertainties are curbing the post-lockdown DEVELOPMENTS recovery In Belgium, as in the euro area and the rest of the world, the COVID-19 pandemic led to a sharp and deep drop in economic activity in the first half of 2020. Early statistics suggest that the decline in GDP was slightly less pronounced than initially feared. However, it is unprecedented in magnitude, reaching almost 15 % year-on-year in the second quarter in both Belgium and the euro area. Moreover, the recovery is still slow and subject to major uncertainty, mainly linked to a rise in coronavirus infections over the last few weeks. In the euro area, real GDP showed a record decline of 3.7 % in the first quarter of 2020 and 11.8 % in the second quarter, GDP GROWTH AND BUSINESS CYCLE INDICATOR following the strict containment measures implemented in most Member States as of mid-March. Those measures have p.. points 4 0 Smoothed data Gross data been gradually relaxed since June, although local or sector- 2 specific restrictions may again be imposed pending upon the 0 0 development of the pandemic. All in all, after having been −2 slashed in the previous round, BPN participants’ GDP forecasts −4 −10 −6 have bottomed out: they now see the euro area economy −8 −20 shrinking by 7.6 % this year. In 2021, the economy could −10 pick up by 5.7 %. Euro area inflation is expected to −12 −30 remain moderate, at around 0.3 and 1.0 % respectively −14 −16 −40 in 2020 and 2021. 20 20 20 208 209 2020 In Belgium as well, activity has rebounded from June onwards. Business confidence indicator (right-hand scale) However, the pace of the recovery is still surrounded by great Year-on-year real GDP uncertainty and is unequal across sectors. In particular, the (percentage changes, left-hand scale) hospitality and event sectors continue to suffer huge turnover Belgim r area losses. According to ad-hoc surveys conducted within the ERMG framework, most businesses expect to see slack demand up Sources : EC, NAI, NBB. to next year, which will continue to weigh on employment and investment. BPN participants currently expect GDP in Belgium to drop by 7.9 % this year but to bounce back by 5.8 % in 2021. INFLATION (HICP) (annual percentage changes) The immediate impact of the COVID-19 crisis on the labour market has been cushioned by extensive recourse to the 5 temporary lay-off system for employees and a similar system for the self-employed. However, as the recovery will remain 4 incomplete, more permanent damage could be inflicted on 3 the economy through a wave of bankruptcies and a peak in unemployment. As for inflation, readings have been distorted 2 by the postponement of seasonal sales from July to August. 1 Overall, HICP inflation has been pushed down by the low oil prices in recent months. According to the consensus 0 forecast, inflation in Belgium should come to 0.5 % on −1 average in 2020 and 1.3 % in 2021. 20 20 20 208 209 2020 In 2020, public finances are feeling the full impact of the Belgim r area economic downturn, as well as increased health spending and support measures for individuals and businesses to tackle Source : EC. the effects of the pandemic. Belgian Prime News participants see the government deficit widening substantially to 89 September 2020 . 9.9 % of GDP in 2020. Although the support measures are largely temporary, the permanent output loss in the economy 0 N will also be reflected in the budget deficit as it will remain higher than it would have been without the crisis, at 5.4 % of GDP in 2021. BPN participants anticipate a rise in the Belgian public sector debt, from just below 99 % of GDP in 2019 to 113.4 % in 2021. Belgian Prime News 2 www.nbb.be SPECIAL TOPIC Belgian banking sector in good shape to cope with the crisis While the Belgian banking sector will suffer credit losses as a result of the COVID crisis, it is sufficiently resilient to absorb this shock and fulfil its critical financial intermediation function in the Belgian economy. Banks maintained ample lending to domestic residents in the early months of the crisis. Loans to Belgian non-financial corporations grew particularly strongly in March and April when corporations drew on existing credit lines. Loans to households rebounded quickly after a temporary dip related to social distancing measures for shops and property visits. This resilience of the credit intermediation function is a key factor in the transmission of various monetary and fiscal support measures for the private sector and it follows from the robust capital and liquidity position that the Belgian banks have built up since the global financial crisis. Banks’ solvency and liquidity indicators remained strong in the first half of 2020, providing large buffers for dealing with shocks and losses going forward. The average common equity Tier 1 ratio came to 15.9 % in June 2020, up from 15.6 % at the end of 2019. The liquidity coverage ratio rose to 158 % as the large uptake of loans under the ECB’s TLTRO III programme was mainly used to boost the liquid asset buffer. The crisis has had a bigger impact on their income statement but the bottom-line result has remained positive (€ 1 billion), thus avoiding an immediate impact on banks’ capital. Return on equity declined to 2.8% in the first half (versus 8.5 % in the same period of 2019) as banks booked large provisions for credit losses that they expect to incur in the context of the COVID crisis. New impairments and provisions amounted to € 2.1 billion, compared to € 0.5 billion in the first half of 2019. Main components of Belgian banks’ income statement (€ billion) 2016 2017 2018 2019 H1 2019 H1 2020 Net interest income 14.8 14.1 14.4 14.6 7.2 7.2 Non-interest income 7.6 8.9 8.3 8.5 4.3 3.6 Operating expenses (-) 13.1 13.4 13.9 13.7 7.3 7.2 Impairments and provisions (-) 1.8 0.7 0.8 1.3 0.5 2.1 Taxes and extraordinary profit or loss (-) 1.6 2.6 2.0 1.7 0.7 0.4 Net profit or loss (bottom-line result) 5.8 6.0 5.6 6.1 3.0 1.0 Source: NBB. Loan defaults remain low for now but are expected to increase in the near future. The deterioration of credit quality in the private sector does not yet show up in the ratio of non-performing loans, which remained stable in the first half of the year (at 2.1 % on average for domestic and foreign loan exposures). Fiscal income-support measures and banks’ moratoria on debt repayments by households and non-financial corporations affected by lockdown measures have undoubtedly helped to keep actual default levels low since March, but probably only temporarily for some loans. Banks’ loan classification (according to IFRS 9) and the above-mentioned provisions show that banks are preparing for higher credit losses in the corporate sector, based on the assumption that corporate bankruptcies will rise, especially in those sectors most affected by the social distancing measures. Asset quality indicators for household loans remain good so far and there are at present no signs of any significant downturn in the residential real estate market. The loan loss ratio (which gives the net flow of new provisions for credit losses, expressed as a percentage of the stock of total loans) increased from 13 basis points for the full year 2019 to 25 basis points already for the first 6 months of 2020. It remains well below the peak of the global financial crisis but the development of the pandemic and the strength of the economic recovery remain uncertain at this point so further (potentially significant) increases in the ratio cannot be ruled out. Belgian Prime News All in all, banks thus seem to be gearing up for a significant rise in non-performing loans but this has so far not affected their resilience or ability to perform their key financial intermediation function in the Belgian economy.