The Top Trends Shaping Major European Banks in 2018

S&P Global Ratings said that its top 50 rated European banks turned a corner last year, a decade after the start of the financial crisis, and are likely to continue down this brighter path in 2018, according to the report, ‘The Top Trends Shaping Major European Banks In 2018’. Idiosyncratic developments aside, there was clear […]

S&P Global Ratings said that its top 50 rated European banks turned a corner last year, a decade after the start of the financial crisis, and are likely to continue down this brighter path in 2018, according to the report, ‘The Top Trends Shaping Major European Banks In 2018’.

Idiosyncratic developments aside, there was clear forward momentum, culminating in a raft of positive rating actions (outlook changes and upgrades) across a number of European banking systems in the third and fourth quarters.

“These actions reflected principally our view of improving economic risks, helped by massive monetary stimulus from central banks, and supportive industry risks, notwithstanding the emergence of fundamental long-term business model challenges,” said S&P Global Ratings credit analyst Giles Edwards.

Elsewhere, for example in Sweden and Germany, our concern about looming asset bubbles receded somewhat. What’s more, for a few banks, we recognized a strengthening in their balance sheets, typically improving capitalization or a growing bail-in buffer.

We start 2018 with no fewer than 15 of the top 50 European banks carrying a positive outlook and only three with negative outlooks on the issuer credit ratings (ICRs), suggesting that this should be another year of generally positive ratings developments.

Under this supportive base case, here are trends we expect to play out in 2018:

Slightly improving profitability, aided by improving economic activity, sustained low NPA formation, and efficiency measures to offset weak revenue growth.
Improved dividend-paying capacity.
Generally stable balance sheets owing to solid economic conditions, modest net lending, NPA stock reduction, and given substantial enhancements in capitalization and funding.
Copious issuance of subordinated instruments to ramp-up bail-in buffers.
Further divestment of government stakes in banks such as ABN, AIB, Bankia, and Belfius, rescued in the financial crisis.
Possibly, the improvement in fortunes of some currently underperforming major banks: Barclays, Commerzbank, Credit Suisse, Deutsche Bank, Standard Chartered, and Royal Bank of Scotland.

“However, European banks’ progress in areas like NPA reduction and debt issuance and the emerging improvement in economic activity could yet be undone if political risks rise or market conditions deteriorate significantly,” Mr. Edwards said.

Furthermore, we continue to monitor the long-term challenges that European banks face:

Optimizing business models to ensure sufficient and sustainable profitability,
Leveraging the benefits of the digital era while fending off nimble emerging challengers,
Delivering effective measures to avoid disruption and franchise damage from cyberattacks and customer data mismanagement.

(Source: S&P Global Ratings)

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