Banks whose clients are exposed to the super El Niño cycle building in the Pacific Ocean are now assessing loan structures and loss risks, with debt rescheduling among options being considered.

By Laura Millan and Alastair Marsh Spain’s Banco Bilbao Vizcaya Argentaria SA, which aside from its presence in Iberia also has a significant client base across Peru, Argentina and Colombia, has asked local risk teams to conduct reviews of loan books as El Niño combines with global warming to pose a unique set of threats.

Measures that can be considered by the bank for its most vulnerable customers include debt rescheduling, BBVA said in an analysis shared with Bloomberg. “The data we are currently generating supports this management process,” it said.

Once BBVA is comfortable with its analysis, it will share the information with clients as part of its advisory process, it said.

The climate phenomenon associated with warming across the equatorial Pacific Ocean is already fanning crop-damaging droughts and floods. The World Meteorological Organization says Southern Africa and Southeast Asia face heightened risks, while parts of Latin America are vulnerable to both drought and flooding.

Concerns among banks follow warnings from money managers that the intensity of the current El Niño cycle will leave investors nowhere to hide, as the weather phenomenon disrupts commodities supplies, drives inflation and widens trade deficits.

Banks based in the European Union are under particular regulatory pressure to report such risks due to evolving disclosure requirements under the EU’s so-called Pillar 3 rules, said Grace Osborne, a sustainable finance analyst at Bloomberg Intelligence. She sees a heightened risk of banks needing to resort to “agricultural loan repayment holidays following severe climate events, given the insurance protection gap in European agriculture.”Danske Bank A/S, meanwhile, has warned of the implications of El Niño beyond commodities exposures.

Companies headquartered outside geographic regions in El Niño’s immediate path may still be at risk via supply lines, with Danske citing shipping and logistics as examples of sectors in the crosshairs, irrespective of domicile.

At JPMorgan Chase & Co. and Citigroup Inc., analysts have published research linking El Niño to heightened risks stemming not just from the agriculture, commodities and energy sectors, but from the impact on the broader economy. And Sebastian Werner, head of climate risk scenario design at Citi, cautions that a widely followed measure of El Niño strength — the Oceanic Niño Index, which focuses on the central tropical Pacific — doesn’t “capture all aspects” of the weather cycle, adding to the complexity of risk modeling.

Banks already highlighting such exposures include Lima-based Credicorp Ltd., which estimated in August that some 9% of its loan book is directly exposed to clients at risk from the fallout of El Niño. The same month, Banco do Brasil SA Chief Financial Officer Marco Geovanne Tobias da Silva said the lender is “very concerned” and “closely monitoring the effects of El Niño,” during a call with analysts.

Intercorp Financial Services, one of Peru’s biggest financial firms, says it has already set up special El Niño loan clauses for customers in fishing and agriculture, with the palette of instruments available including grace periods and reschedulings.

At Standard Chartered Plc, which aside from its operations in the UK also has significant client exposures in Africa, the Middle East and Asia, bankers are being asked to do a granular assessment of the risks associated with the current El Niño cycle.

“We are closely monitoring the potential impacts of El Niño,” said Karen Wilkinson, global head of climate, sustainability and reputational risk at Standard Chartered. “We have undertaken analysis at a portfolio level across our corporate and investment banking business and are now incorporating this into client-level climate risk assessments.”That’s in addition to monitoring El Niño-related physical risks such as flooding, storms and heat stress, “across key operating locations and data centers,” she said.

BI’s analysis of EU banks indicates that aside from BBVA, CaixaBank SA and Banco Santander SA also have agricultural loan books that are highly exposed to physical risks. Such exposures have the potential to feed through to credit quality faster than real estate loans, Osborne said.

Julia Lucena, CaixaBank’s climate risk manager, said that “while sensitive exposures represent around 60% of the bank’s lending to agriculture, livestock farming, and fishing, the sector itself accounts for less than 1% of CaixaBank’s total lending portfolio,” in a written response to questions. “As a result, the sector’s overall physical risk exposure to the bank is considered limited.”CaixaBank said it monitors its lending exposure to physical climate risks across all sectors and has developed a framework to assess how weather events can impact credit risk metrics, especially the possibility of default, or of loss in case of default. Lending deemed sensitive to physical climate risks has remained relatively stable at the bank since 2022, Lucena said.

Santander assesses climate risks under different scenarios and time horizons, including specific impact assessments when significant events take place, a spokesperson for the bank said by email. Santander has €1.7 billion of agriculture, forestry and fishing loans exposed to physical risk, equivalent to 56% of this portfolio.

“Our current focus is on anticipation, preparedness and response capacity,” Santander said. The bank also has specific monitoring and early-warning mechanisms in place, including weekly weather bulletins and monthly El Niño updates, it said.

“These help relevant teams identify potentially affected areas and assess exposure across portfolios and clients,” Santander said. The bank has “contingency and coordination procedures that can be activated” as needed, it added.

BBVA said it expects to monitor the fallout of El Niño for its clients in two ways. What it describes as Phase 1 would entail quantitative analyses based on historical data, comparing neutral climate scenarios with the most intense El Niño events on record. Phase 2 entails integrating seasonal meteorological models with monthly updates for key variables to establish an early warning system to help clients prepare for extreme weather shocks.

“This type of application has never been attempted before,” the bank said. “Therefore, it serves as a test and validation of the models for future use cases.”