Moody's upgrades banking outlooks for six European countries

Belgium, Denmark, France, Italy, the Netherlands and Spain — six of Europe’s 10 largest banking systems — have had their outlooks changed by ratings agency Moody’s from negative to stable, reflecting the improved economic outlook one year on from the start of the Covid-19 pandemic.

“The changes in outlooks reflect our expectation that the deterioration in asset risk will be moderate and that profitability will recover as economies improve following sharp real gross domestic product declines in 2020,” said Louise Lundberg, a senior credit officer at Moody’s.

“Nonetheless, business conditions will still be challenging as government support measures are gradually withdrawn and recovery paths remain uneven across the continent.”

The banking system outlooks represent Moody’s assessment of fundamental credit conditions that will affect the creditworthiness of banks over the next 12–18 months.

German and UK outlooks still negative

The outlook for remaining four of Europe’s 10 largest banking systems is not as positive. Moody’s has maintained its stable outlooks on the Swedish and Swiss banking systems, and kept negative outlooks for the banking systems in Germany and the UK.

The outlooks for both Germany and the UK were already negative before the pandemic lockdowns began. For German banks, it reflects the erosion of bank profitability resulting from low interest rates and weak efficiency, Moody’s said. For UK banks, it reflects the expected deterioration in asset quality as support measures are withdrawn and ongoing profitability pressures are exacerbated by lower rates.

The Swedish and Swiss banks, however, demonstrated greater resilience compared to other European banks during 2020, partly helped by more shallow economic recessions, according to the ratings agency.

For all 10 banking systems, the potential for uneven economic recoveries in case of new lockdowns, along with rising problem loans and potential further large provisioning needs as government support is reduced, are the key downside risks.