2011 Outlook Stable for Northern European Banks

by: Research Recap

Fitch Ratings says the credit outlook for most banks in Northern Europe is Stable. However, they could be hurt by contagion effects from difficulties faced by peripheral euro zone countries, Fitch says in this complimentary download from the Alacra Store.

Selected Highlights:

Striking a new balance: The Outlooks on Issuer Default Ratings (IDRs) for most banks in northern Europe (NE) are Stable. In general, the fundamental financial positions of banks in this region are either stable or improving. However, this improvement is balanced by growing political and social momentum to ensure that taxpayers’ money is no longer called upon to support banks, which is negative for bank ratings.

Slowly improving macroeconomy: GDP growth was above expectations in NE (France, Germany, the UK, Benelux, the Nordics, Austria and Switzerland) in 2010, particularly in Germany and Sweden. Fitch Ratings expects slower but still positive growth in 2011. NE countries are likely to continue to be providers rather than receivers of financial support in the face of the concerns facing the euro area in 2011. However, they are unavoidably exposed to any pitfalls the region encounters.

Asset‐quality strengthening: Substantial impairment charges since 2008 were driven by exposure to central and eastern Europe, structured products and commercial real estate. Problem assets largely remain on the banks’ balance sheets, but most impairment costs have been taken. Further charges in 2011 will be smaller. With little evidence of deterioration in domestic asset quality, Fitch expects impairment charges at NE banks to continue their downward trend in 2011.

Gradual improvement in operating profit but revenue generation still a key concern: Lower impairment charges should be reflected in improved operating profit. However, pre‐impairment profit will suffer from deleveraging, low interest rates, lack of corporate activity and higher funding costs, all contributing to weakened revenue. There is a limit to how far cost containment can go.

Funding and liquidity improving: Most banks in NE have been able to improve maturity profiles and enhance liquidity buffers. Although this has come at a cost, increased use of covered bonds, for which there are some deep domestic markets in NE, is helping banks contain funding costs.

Protracted capital increases likely: Many NE banks are planning to improve capitalisation, at least in part by deleveraging, but with weak demand for most “legacy” assets, Fitch expects this process to stretch out way beyond 2011.

Dividend payments will remain low or on hold at many banks, and repayment of state‐injected capital may take longer than governments initially anticipated. Fitch expects further equity issuance from stronger banks as opportunities emerge.

Progress on resolution: Notable progress to enact bank resolution legislation is being made. Around a quarter of banks in NE are at their Support Rating Floors, with most Outlooks Stable to reflect Fitch’s view that governments will continue to support banks’ senior creditors in full at least until Europe returns to financial stability.

What Could Change the Outlook
Any change in Fitch’s outlook for NE banks is likely to be negative rather than positive. The two main potential drivers for this would be progress in implementing bank resolution schemes to the detriment of senior bank creditors, and/or economic developments proving more negative than Fitch is projecting. The latter could result from further contagion effects on NE countries from difficulties faced by peripheral euro zone countries. It would also emerge from a wider global economic slowdown, causing a “double dip”.