Deterioration in Cost of Risk Yet to Materialise at European Banks

DBRS Morningstar has released a commentary on the cost of risk (CoR) of banks in Europe in H1 2023, including banks in Austria, France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Denmark, Finland, Belgium, Ireland and the United Kingdom

Key highlights include:

• European banks reported low and very similar levels of CoR in H1 2023 as in the full year 2022 and H1 2022 results, despite the rapid increase in interest rates since the second half of 2022.

• As a result, we anticipate most banks will not report asset quality deterioration and higher CoR until some point later in 2023/2024 when the higher interest rate environment starts to take a toll on borrowers’ capacity to repay their debt.

• Similar to FY 2022 results, banks in Spain and Italy remain the banks that showed the highest average CoR levels in H1 2023.

“Although European banks maintained similar or even lower CoR levels in H1 2023 compared to FY 2022 and H1 2022, we expect the higher interest rate environment to push up CoR levels up in 2023/2024,” notes Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team. “However, it seems unlikely that we will see an abrupt and rapid increase in CoR levels at European banks unless unemployment and GDP growth metrics materially deteriorate.”