Moody’s has reviewed the outlooks on nine European banking systems in light of the coronavirus pandemic, and changed the outlook to negative on five of them.
These are Norway, Finland, Hungary and Portugal, which changed to negative from stable, and Slovakia, which changed to negative from positive.
The outlooks on four other banking systems – the Czech Republic, Poland, Austria and Ireland – remained stable.
Today’s outlook changes reflect the likely consequences of the coronavirus outbreak in Europe. Moody’s projects a cumulative contraction of the economy over the first and second quarters of 2020. Although supportive fiscal and monetary policy measures will likely aid recoveries with above-trend growth in subsequent quarters and in 2021, the output loss in the second quarter is unlikely to be recovered. In this environment, banks’ problem loans will rise, and their increased loan loss provisions will reduce profitability. Most European banks’ profitability is already low relative to global peers.
Still, in most of the banking systems, liquidity is strong and capital buffers are substantial, providing a solid base to absorb unexpected losses.
The change in the outlook on the Norwegian, Finnish, Hungarian and Portuguese banking systems to negative from stable reflects Moody’s expectation that all four countries will experience a sharp contraction in economic growth. Banks’ profitability will weaken due to rising loan loss provisions and reduced lending growth.
While Norwegian banks currently exhibit low volumes of non-performing loans and very high levels of capitalisation, and benefit from generous crisis support measures underpinned by the country’s sovereign wealth fund, the impact of the coronavirus on their asset risk will be exacerbated by the fall in oil prices.
In Slovakia, where the outlook for the banking system has changed to negative from positive, the coronavirus-induced slowdown will reverse a previous improvement in asset quality. Slovakia’s high levels of household debt and significant dependence on exports could exacerbate the impact of the downturn.
Moody’s has kept stable outlooks on the Czech, Polish, Austrian and Irish banking systems
In the Czech Republic and Austria, the increase in problem loans will start from a low base, and stronger bank profitability than in many other European banking systems adds to resilience.
The deterioration of loan quality in Poland will likely be moderate as lending growth has been relatively subdued.
In Ireland, problems loans had been reducing rapidly due to restructurings and portfolio sales. However, Moody’s expect a delay in asset sales and an increase in new arrears. Even so, solvency is expected to remain strong.