Based on a sample of 55 European banks analysed, DBRS considers that overall they are "relatively well positioned, from a rating perspective, this early 2023". Portugal among the most exposed.
European banks face a “challenging outlook” due to the “uncertain economic situation” experienced in many European countries, with Portugal among the most exposed to a potential deterioration in asset quality, according to DBRS Morningstar.
In a commentary released on Monday, DBRS notes that, even so, European banks enter this most “challenging” phase after having “demonstrated resilience throughout the pandemic” and believes that “their ability to generate earnings will benefit from recent interest rate increases”, so their balance sheets “should remain strong, thanks to generally solid capitalisation levels and ample liquidity”.
“We expect significantly higher net interest income (NII), which will initially offset the increased credit risk due to the weaker economic outlook in most European countries,” it adds.
According to the ‘rating’ agency, “levels of loan risk-related provisions are expected to increase”, with the “level of asset quality deterioration” in 2023 and beyond “varying from country to country, but also starting from relatively low levels of non-performing loans (NPLs)”.
“As a result, most European banks are well positioned to meet this new challenge arising from the operating environment,” it considers.
Based on a sample of 55 European banks analysed, DBRS considers that overall they are “relatively well positioned, from a rating perspective, this early 2023”.
“The majority of DBRS Morningstar publicly rated European banks showed stable trends at the end of fiscal 2022, reflecting the reversal of some of the negative trends that had been assigned to them during the Covid-19 pandemic,” it says, detailing that “the negative trends that were reversed were mainly based on improving revenues, solid asset quality metrics and good capital levels.”
Among the countries “most exposed to asset deterioration” for their respective banks, the agency points to “the United Kingdom, Ireland, Sweden, Portugal and, to a lesser extent, Spain,” as they “are more exposed to a rapid change in interest rates due to the predominance of variable rates in loan portfolios.”
However, it notes, only two of these countries – the UK and Sweden – are forecast to experience an economic recession, so “based on asset quality metrics such as loans at stages 3 and 2, the UK stands out as vulnerable to a greater deterioration in asset quality in 2023 than the other European countries in the sample analysed”.
For their part, “Belgium, Portugal, France, the Netherlands and Italy also reported a large increase in stage 2 loans, indicating a potential deterioration of stage 3 loans in 2023.”
Pointing out that “the risks of mortgage loans vary significantly between European banks”, DBRS considers that even in countries where there is a higher proportion of fixed rates, in those where fixed rate terms are shorter, borrowers are still exposed to higher rates when the fixed term comes to an end”.