European Banks: Lower Cost of Risk in FY21; However, Likely to Worsen After Ukraine War

DBRS Morningstar has released a commentary on the cost of risk (CoR) of banks in Europe, including banks in France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Belgium, Denmark, Finland, Ireland and the United Kingdom (UK).

Key highlights from DBRS Morningstar’s commentary include:

• European banks reported significantly lower levels of CoR in FY21 with most banks reporting either lower levels or releases of provisions.

• Most banks also reached FY21 CoR levels that were either similar to or lower than in FY19.

• However, we expect CoR levels will deteriorate in FY22 compared to FY21 as the uncertainty around the war in Ukraine will inevitably negatively impact European countries.

“The economic consequences of Russia’s invasion of Ukraine as well as the effects of volatile energy, oil and other asset’ prices and high inflation are yet to be seen in European countries, however, we expect European banks’ CoR to deteriorate in FY22. Regardless of the banks’ direct exposure to Russia and Ukraine, European banks would be required to adjust their economic models to reflect more negative economic assumptions and book higher provisions, breaking the pattern seen in the last 12 months of lower provisions.” said Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team