Fitch Ratings on European Banks
Profitability to Weaken Only Slightly in 2024
According to a new report by Fitch Ratings, Europe’s premier banking institutions are anticipated to maintain robust profitability in 2024, though there may be a minor decline owing to a slight increase in loan impairment charges (LICs) and operational expenses.
In Fitch Ratings' most recent quarterly credit tracker, the majority of the 20 sizable banks showcased strong performance in 2023, benefiting from elevated interest rates and solid asset-quality outcomes. Nonetheless, towards the end of the fourth quarter of 2023, a few banks experienced a stabilization or slight reduction in net interest margins (NIMs) due to delayed asset repricing and the increased cost of deposits. In certain instances, LICs rose in preparation for expected declines in asset quality, especially within the commercial real estate (CRE) sector.
Fitch Ratings projects that the ratio of operating profit to risk-weighted assets for these banks will average around 2.6% in 2024, slightly down from 2.7% in 2023, supported by the durable nature of net interest income (NII) as any reductions in policy interest rates are anticipated to occur at a measured pace. Nonetheless, profitability paths are expected to vary across banks, influenced by differences in balance sheet management, rates of deposit pass-through, and strategies for interest rate hedging.
A modest decrease in deposit margins is generally anticipated by Fitch Ratings. In environments predominantly characterized by variable-rate loans, asset margins may also face slight reductions unless there is an increase in business volume and interest rates remain constant.
French banks did not fare as well in 2023, with NIMs falling below 1% due to faster repricing of liabilities compared to assets. However, NIMs are expected to rebound to long-term averages as loan portfolios adjust, aiming for 1.1%–1.2% in 2024. For French banks, Fitch Ratings foresees a significant single-digit rise in NII, as opposed to the stagnant or marginally decreased NII observed in other regions.
A modest worsening in asset quality is anticipated by Fitch Ratings for 2024, attributed to affordability challenges, subdued economic expansion, and credit losses in CRE. The CRE exposure of the 20 banks is estimated to be around 75% of average common equity Tier 1 capital. Nonetheless, the earnings are expected to cover CRE credit losses, and it's unlikely that CRE exposure will trigger asset-quality downgrades.
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Relevant Links:
https://www.fitchratings.com/research/banks/large-european-banks-profitability-to-weaken-only-slightly-in-2024-27-03-2024
https://www.fitchratings.com/research/structured-finance/covered-bonds/large-european-banks-quarterly-credit-tracker-march-2024-27-03-2024
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