Outlook dims for European banks

With economic headwinds accumulating and an ongoing energy crisis weighing on growth prospects, Moody’s Investors Service is downgrading its outlook on several European banking sectors.

The rating agency has cut its outlooks to negative from stable for Germany and Italy, along with Hungary, Poland, Slovakia and the Czech Republic.

The downgrades reflect the impact of economic trends, including high inflation and rising interest rates, along with the region’s energy crisis.

“Rising prices and rates will affect the creditworthiness of many businesses and households, triggering the formation of new problem loans,” Moody’s said.

“We have changed the outlook to negative for six banking sectors as we expect operating conditions to deteriorate further, weakening banks’ loan quality, profitability and access to funding,” said Louise Welin, vice-president and senior credit officer with Moody’s, in a release.

“Economies are being hit by the energy crisis and high inflation following Russia’s invasion of Ukraine,” she added.

At the same time, Moody’s maintained its outlooks for the banking sectors in the U.K. and Austria. In  those markets, “strong capital and improved margins will offset pressures from macroeconomic headwinds,” Moody’s said.

Separately, Fitch Ratings reported that expectations of higher credit losses in 2023, rather than actual impaired loans, caused the major U.K. banks to increase their provisions in the third quarter.

“We expect the banks’ ratings to be resilient to a moderate macroeconomic deterioration given sound asset quality metrics and underwriting standards, although their ratings headroom to absorb a severe downside scenario has reduced,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.