S&P Sees Accelerating Downgrades of European Banks
Standard & Poor’s expects to see an acceleration in the number of rating downgrades of European banks in the second half of 2008 and into 2009.
And the difficult funding environment for smaller or more specialized institutions may also encourage some consolidation, S&P says in its latest Industry Report Card. “Although the main factors driving rating actions in the last year were liquidity pressures and the impact of write-downs, we expect rating actions over the coming year to be driven primarily by concerns over the level of credit losses in loan books, and by differences in capital philosophy.”
S&P expects global investment banking revenues, excluding write-downs, to decline some 20%-30% in 2008 compared with 2007. “Performance for the year to date is broadly in line with this expectation, but there is clearly downside risk to this estimate. We expect cost flexibility to help mitigate the impact of lower revenue, with some significant reductions in staff numbers, but restructuring in itself can be costly. There is also a risk of litigation costs.
This combination of factors offers the potential for a significantly worse scenario to unfold.
Capital policy is likely to become a greater driver of rating trends, S&P says. “Banks that are adopting more conservative capital approaches are likely to protect their ratings more than those that continue to maintain more aggressive philosophies. We note that capital has not been a relative ratings strength for many of the major European banks, but instead has been a neutral to constraining ratings factor. Bank ratings would be underpinned if more cautious stances were taken by banks to reflect the heightened market uncertainties.”
S&P’s Industry Report Card provides individual analysis of 50 European Banks.
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