Some Major European Banks Facing Short Term Challenges
A clear divergence in the fortunes of major European banks means some players face particularly difficult conditions in the near term, says Standard & Poor’s Ratings Services. What’s more, the structural effects of the ongoing dislocation in credit markets could have far-reaching effects on some banks’ business models, S&P says in a new Industry Report Card: Mind The Gap–Diverging Trends As Major European Banks Face Testing Conditions.
The report points out four pressures affecting major European banks:
- Material exposure to investment banking and capital markets-related activities.
- Retail and commercial banking exposure in countries with overheated retail banking markets, and unwinding property market conditions.
- Significant exposures to structured credit investments.
- Systemic pressures resulting from tougher funding conditions, the global repricing of risk, and economic weakening.
Rating pressures are most evident for banks affected by the first three factors, the report says.
Even when banks have limited reliance on investment banking activities, or relatively low exposure to overheated markets or to fixed-income investments that have declined in value, earnings prospects may still be restrained by the combination of higher funding costs, slower volume growth, and the return of credit losses to more normalized levels.
Some ratings with stable outlooks could come under pressure, depending on the magnitude and duration of the current dislocation in credit markets, and the extent of the spillover into the real economy. Downgrades may also occur if banks do not meet Standard & Poor’s expectations of relative earnings resilience and risk management capacities.
At present, 14 of the top 50 banks have a negative outlook assigned to their long-term ratings. Only three are assigned a positive outlook. The S&P Report card contains individual analysis of 50 major European banks.
Credit risk charges remain extremely modest on average across the top-50 European banks, but there is greater divergence in the recent numbers. For example, the chart below reflects the exposure of banks such as HSBC Holdings (London: HSBA) and Barclays Bank (London: BARC) to the U.S. subprime mortgages spillover.
European banks have to date been reluctant to raise new capital unless forced to by a sharp fall in capital ratios, S&P says.
We believe that recent market conditions could drive some banks to adopt less aggressive approaches toward capital management, but it is still far too early to call this.
“More generally we expect that recent market conditions have fed into higher capital requirements under banks’ capital models (for example, increased market volatility has pushed up Value at Risk (VaR) measures and therefore the required capital against any given set of market positions). This would also occur as credit losses rise.”
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