S&P Says European Banks Facing Rising Credit Losses

Standard & Poor’s does not expect all European financial groups to emerge from the current recession intact.

In an Industry Report Card , S&P points out that European banks’ credit loss provisions more than doubled in 2008 compared with 2007. “The annual total for the 50 largest European banks was €128 billion, with a progressive increase in the third and fourth quarters of the year. If the rate of provision for credit losses in second half 2008 simply were to continue throughout 2009, the total for the 50 largest European banks would increase a further €50 billion,” said Standard & Poor’s credit analyst Scott Bugie.

We expect (credit loss) provisions to rise faster still in 2009. In many European countries, the rates of domestic loan losses in 2009 will be double that for 2008.

The bottom quintile of European banks in 2008 as measured by the ration of pretax earnings to assets:

Bayerische Landesbank
Credit Suisse Group (CS) (US GAAP accounts)
Dexia Credit Local
Fortis Bank SA/NV
HBOS PLC
HSH Nordbank AG
Hypo Real Estate Bank AG
KBC Group N.V.
Royal Bank of Scotland Group PLC (RBS)
UBS AG (UBS)

Moody’s on Monday placed bottom ranked UBS (NYSE: UBS) on review for downgrade.

“Our outlooks are negative on the credit ratings of more than half of the largest banking groups in Europe, due to our assessment that they have poor earnings prospects and that industry fundamentals have weakened. While positive recent news from equity and credit markets and flush first quarter 2009 trading results of some banking groups provide encouragement, we believe that the multi-year costly process of cleaning damaged loan books will dominate bank results over the medium term. Weakened revenue flow from other business lines in the recessionary environment will make the cleanup task harder still.”

“The ratings on many European banks would be lower if not for the highly supportive stance governments have taken. The future credit standing of the European banking industry largely depends on the impact of current and future sovereign government policy actions that cover several fronts. Ratings on bank hybrid capital securities are under particular pressure. In our view, the poor financial performance of the banking sector increases the potential that certain institutions will suspend payments on their hybrid securities to preserve much needed capital.

… the path from the troubled present to a potentially more stable future will be rocky. In our opinion, not all European financial groups will survive the journey intact.