Large European Banks Well-Positioned to Weather Economic Slowdown
Fitch Ratings-London-22 Dec 2022: The majority of large European banks are in a good position to weather the slowdown in economic growth in 2023, and the impact it will have on the quality of their assets, Fitch Ratings says.
We anticipate only a minor decrease in their impaired loan ratios in 2023 because significant proportions of their loans are residential mortgage loans , which have proven to be resilient over the course of time in many countries, and underwriting standards are being tightened in the wake of previous crises.
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We also anticipate EU and country-specific support programs to help cushion the negative effects of the economic downturn on businesses in the private sector. But there are certain areas of risk in SMEs, especially ones with weaker finances due to the pandemic or within the areas that are most vulnerable to the rise in prices for energy and interest rates.
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Commercial real estate is also likely to be affected when the economy slows down, which reduces demand and raises the number of vacant properties. Rent growth is not guaranteed by indexation linked to inflation, and will be challenged by tenants who face increased costs, as well as prudent retail tenants.
We therefore anticipate that higher loan-improving charges will affect banks in a moderate way Profits for 4Q22 and 2023 because of the prudent forward-looking provisioning.
The majority of retail banks in Europe remain to reap the benefits of the higher interest rates in the coming year, with the exception of France which we anticipate an increase in net interest margins for a short period of time. However, rising inflation will create cost pressures and diminish the advantages of higher rates.
Increased geopolitical and macroeconomic uncertainty can be favorable to trading in 2023, however it will impact investment-banking and asset-management activities through at the very least two months to come. The second-order consequences of the energy crisis are an issue for banks’ financial performance in 2023.
The capitalization of banks will remain stable through 2023, but the headroom for rating will be reduced due to the economic downturn and capital levels decreasing towards the banks’ medium-term capital objectives.
