Fitch Ratings holds a mixed view on the prospects of southern Europe banks for 2014, noting that the funding and liquidity profiles of banks in southern Europe have generally stabilised, with the exception mainly of Greece and Cyprus, where funding imbalances persist.
While the features of banking systems in the region vary, they are all affected by relatively weak economic prospects, despite an expected return to very modest GDP growth for all countries except Cyprus in 2014, Fitch says.
“The subdued operating environment will continue to fuel asset quality pressures and Fitch anticipates further NPL ratio growth, albeit generally at a slower pace than in 2012 and 2013. We expect lending volumes to remain low,” it adds.
In 2014, in the absence of severe macroeconomic shocks, liquidity will continue to be supported by deleveraging, Fitch says, adding, however, that many banks continue to rely on central bank funding, underlining vulnerabilities.
Of its rated financial institutions in Spain, Italy, Portugal, Greece, Cyprus, Andorra and Malta, 60% are currently on Negative Outlook, Fitch notes.
However, the picture varies markedly by country, with all banks in Greece and Malta on Stable Outlook, all Portuguese banks on Negative Outlook, and the majority of Spanish and Italian banks on Negative Outlook, it says.
According to Fitch, profitability prospects are limited in view of low interest rates and volumes and income from debt securities will remain a material earnings contributor.
It adds that net income for the aggregate region should benefit from a reduction in impairment charges, although they will remain high, after heavy provisioning in 2012 and 2013, and also from more competitive funding costs and the impact of cost reduction efforts.
Fitch says banks in the region largely meet capital requirements and believes that further capital building efforts will be prioritised to offset asset quality risk and weak earnings prospects, but also in the context of Basel III rules.
However, Fitch does not discard the possibility of additional capital requirements for individual banks, but also assumes that banking systems in the region that have needed external support should do relatively well in next year’s asset quality reviews given the scrutiny that they have already been subjected to, noting that this will also depend on the criteria applied.
Fitch sees some Viability Rating (VR) upside for southern European banks in 2014, notably for recapitalised banks that successfully implement their restructuring as planned, contain asset quality pressures and return to sustained profits for their core banking activities.
It adds that failure to do so may result in VR
