European Banks: Rating Outlook Stable for 2022

DBRS Morningstar has released a commentary discussing the outlook for European banks in 2022.

Key highlights include:

DBRS Morningstar anticipates a generally stable outlook for the ratings of European banks in 2022, following the reversal in 2021 of some of the negative rating trends that were placed at the beginning of the pandemic in 2020.

Nevertheless, going into 2022, European banks still face a number of profitability challenges. Most banks benefitted from lower loan provisions or provision reversals in 2021, and these are less likely to be repeated. Also, capital market revenue for larger banks are unlikely to be at the same level as in 2021. Pressure on net interest margin (NIM) remains as a result of low interest rates, and achieving improved cost efficiency levels will remain a key focus.

DBRS Morningstar expects modest asset quality deterioration over 2022-2023 as authorities remove support measures that have supported asset quality through the pandemic to date. But, as this is coming from relatively low levels of NPLs, the increase should be manageable, particularly given some improvement in banks' capital levels thanks to improved profitability as well as regulatory measures.

"European banks are generally in better shape than they were a year ago. Net results improved in 2021, largely thanks to lower loan loss provisions and strong revenue from capital markets reinforcing already robust capital positions. Nevertheless, challenges remain as we head into 2022. Net interest income is unlikely to improve assuming a still low interest rate environment, and we expect modest asset-quality deterioration in 2022-23 although it should be manageable for most banks" said Vitaline Yeterian, Senior Vice President, Global Financial Institutions at DBRS Morningstar.