S&P report + rating actions: European banking sector
Overall, European bank performance could be somewhat more buoyant, at least at a surface level, in 2021, S&P Global Ratings noted in a report published today.
“While we remain mindful that asset quality will weaken, easing downside risks give us more confidence in our base-case projections for European bank profitability and capitalization,” said S&P Global Ratings credit analyst Giles Edwards.
Our projections foresee the vast majority of European banks reporting improved profits in 2021 versus 2020, aided by a lower credit impairment charge (with writebacks for some), and a rebound in economic activity that could gradually improve fee and commission income (see “Economic Outlook Europe Q3 2021: The Grand Reopening,” published 24 June 2021).
Net interest income will remain difficult, however, with low credit growth (outside a gradual rebound in consumer credit and a general pick-up in mortgage activity) and the last turn of margin pressure for many banks as repricing of deposits and new loans becomes more evident in 2022. With regulatory capital ratios ending 2020 at all-time highs for many, and with likely low risk-weighted asset growth in 2021, the cautious restarting of dividends (for the majority) would mark a return to more normal operating conditions.
We have reviewed our ratings on around 60 European banking groups domiciled in 10 European countries–Austria, Belgium, France, Germany, Ireland, Italy, The Netherlands, Poland, Spain, and the U.K. In almost every case, the ratings had been on negative outlook since spring 2020, linked to doubts about the effect of the pandemic on asset quality and capitalization, business model and profitability challenges, or both.
“Reported asset quality will likely deteriorate across Europe as fiscal support ebbs, but we now see the challenge as highly manageable for most banks and expect that capitalization will remain robust even once measured dividends restart,” said Mr. Edwards.
Cyclical and structural factors continue to weigh on many European banks’ profitability and so their business and operating models. As a result, we have taken mixed rating actions, revising the outlooks on many to stable, but also downgrading a small number where our ratings did not already fully reflect the issues that they face.
This report does not constitute a rating action.