Over the past two years, there has been only one ratings downgrade for one of Europe’s top 50 banks, according to S&P. The agency foresees stable balance sheets and good results from banks in Central, Eastern and Southeastern Europe. But slowing growth in the big economies and low profitability means S&P foresees more negative ratings actions in 2019 than the year before. Kat Van Hoof reports.

The post-crisis clean-up of bank balance sheets has borne fruit across Europe, as capitalisation remains strong and high asset quality cushions profitability. Bank fundamentals have improved over the past couple of years, as has the level of systemic risk in smaller European economies. In S&P Global Ratings’ 2018 risk assessment, most of the negative outlooks are linked to specific situations such as Danske Bank’s money-laundering allegations and BBVA’s impairment charges in Turkey.

Across Europe, most banks still struggle with profitability, throwing into question the long-term sustainability of their business models. While there is no cause for immediate alarm, the lacklustre earnings reports hardly make a compelling case for shareholders or prospective investors. Investment banking from European players overall remains well behind the results of US peers. Some banks have done well to cut costs, notably Credit Suisse and UniCredit, but it is difficult to transform this into an effective long-term strategy.

Growth is slowing globally, but sluggish numbers in 2018 out of Germany, traditionally seen as the engine of Europe, are particularly concerning. Europe is facing a number of geopolitical uncertainties, with Brexit and European elections coming to a head in spring, which could further dent growth. Central and Eastern Europe at least are expected to brings some fairweather GDP growth figures, estimated around 2.5%-3.5% through to 2020.

A major challenge for Europe remains the unwinding of years of monetary stimulus. The ECB is starting to pull back on quantitative easing, but the deposit rate has been stuck at -0.4% for several years. Rate rises would help boost bank profitability, but S&P also expects liability costs to go up. 

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