Gloomy Economy, Low Rates Put Pressure on Western European Banks


Friday, December 13, 2019 / 02:40 PM / Fitch Ratings / Header Image Credit: nytimes


The overall sector outlook for western European banks in 2020 is negative as revenue generation is likely to be pressured by the weak outlook for GDP growth and continued low interest rates, Fitch Ratings says. We expect credit losses to increase from their cyclically low levels, and banks with weaker underwriting standards and greater reliance on net interest income could face significant earnings pressure. However, many banks will be able to support earnings with further cost-cutting.


We do not expect a sharp rise in non-performing loans (NPLs) as unemployment remains low and continued low interest rates should help borrowers to service their debt. We expect banks in southern Europe to continue reducing their high levels of legacy NPLs through disposals, as low interest rates should help to maintain demand from investors.


Within the region, we have changed the German banking sector outlook to negative as we do not expect banks' persistently weak operating profitability to improve materially, which makes the sector more vulnerable than most of its northern European peers to the deteriorating operating environment. We expect the German economy to grow by only 0.9% in 2020 amid lingering global trade uncertainties, making it harder for German banks to maintain the robust loan growth that helped them contain margin erosion in the past two years.


We have revised the Italian banking sector outlook to stable from negative, where it had been since 2017, as we expect the performance of Italian banks to have stabilised. Pressure on revenue from low interest rates and weak lending demand from the domestic corporate and SME sector will persist, but stronger asset quality, regardless of the lack of economic growth, and stronger NPL coverage should help to keep loan impairment charges under control and underpin profitability.


The sector outlook for the UK remains negative as the banks are facing significant uncertainty going into 2020 due to Brexit and the likely changes to economic and fiscal policy after the December 2019 elections.


The positive outlook for the Greek banking sector reflects our expectation that the banks' credit profiles, albeit still very weak, will further improve in 2020 as NPL reduction continues.


The other countries' banking sector outlooks are stable, generally reflecting the concentrated nature of their banking systems. Banks in concentrated sectors tend to be more resilient as they typically benefit from stronger market positions and a more diverse business mix.


Risks from Brexit and the US-China trade dispute remain material and could weigh on European economies, putting pressure on banking sectors. Almost all UK banks' ratings are on Rating Watch Negative, reflecting the risk that a no-deal Brexit could significantly disrupt the UK economy. Even if the UK agrees a withdrawal deal to leave the EU in January 2020, a "cliff edge" risk is still possible until such time as a final trade agreement is reached.


Negative Outlooks on several Italian banks' ratings reflect the Negative Outlook on the Italian sovereign rating. Apart from the UK and Italy, most western European banks ratings are on Stable Outlook, and any Negative Outlooks mostly reflect greater risk to ratings from pressure on earnings or business models.

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