Daily News: December 30, 2015

European Banks Stable But Risk, Profitability Pressures Remain in 2016

Moody’s Investors Services reports financial fundamentals will stabilize in most European banking systems due to tighter regulation, stronger capitalization and a modest pick-up in private sector credit demand. However, asset quality risk and persistent profitability pressures will pose challenges in 2016, with varying degrees across the different regions.

Moody’s report, “Banks — Europe: 2016 Outlook: Fundamentals Now Stable, But Asset Risk and Profitability Pressures Remain,” is available for subscribers on Moody’s website. The rating agency’s report is an update to the markets and does not constitute a rating action.

“Banks in Europe have bolstered risk buffers and the impetus has changed from deleveraging to stabilizing and growing the business,” said Carola Schuler, a managing director at Moody’s. “We see stronger credit profiles across the board, despite a muted and uneven economic recovery.” Moody’s has now revised most European banking system outlooks to stable from negative.

However, profitability pressures for European banks will increase in 2016. “We consider a protracted low-yield environment the key downside risk to EU banks’ profitability,” explained Ms. Schuler. “With record low interest rates, net interest margins will continue to narrow, while funding costs have little room to fall further.”

Among the non-euro area countries, UK banks’ asset quality indicators, on the other hand, will remain strong in 2016 and Moody’s expects further balance sheet improvements on the back of favorable economic conditions. Funding and liquidity levels will also remain strong as UK banks benefit from stable retail deposit bases.

Nordic banks are also positioned well going into 2016, with strong asset quality, profitability and capital. Central and Eastern European banks will benefit from faster growing economies but will also face regulatory uncertainties in selected countries. Low commodity prices, geopolitical risks and Russia’s economic weakness will challenge banks in the Commonwealth of Independent States in 2016.