Moody’s: Outlook for European banks turns negative; CEE, CIS remain stable

Moody’s has revised its outlook on the banks of the eurozone and the UK, changing it from stable to negative, while its Central and Eastern European outlook, as well as its outlook on the Commonwealth of Independent States (CIS), a Russian-led formation of post-Soviet states including Armenia, Azerbaijan, Belarus and Moldova, remained stable, the investor service of the US-based international ratings agency has said in its annual report.

Moody’s decision to revise the outlook came “as weakening economic prospects in much of the region will cause loan quality and profitability to deteriorate.”

The outlook for banks in the eurozone was changed to negative as the economic slowdown and a continued accommodative monetary policy will erode already weak profitability. In the UK, the outlook for banks is also negative as Brexit-related uncertainty will weaken operating conditions and slow loan demand. “The UK and German banking systems account for the largest share of banking assets in the region and drive the overall negative outlook,” said Carola Schuler, a managing director for banking at Moody’s in a statement.

Discussing Central and Eastern Europe, Moody’s analysts agree that the region’s economic growth would also slow, however, it would still “outperform the euro area and foster business opportunities for the banks.”

In the CEE region, strong lending will weaken sound capital and liquidity buffers, while solid profitability will be challenged by low interest rates and rising loan-loss charges.

As for CIS banks, Moody’s expects that their operating conditions will remain stable despite the projected economic slowdown. While their profitability will benefit from lower loan-loss provisioning needs and funding reliance on customer deposits is a strength, capital will be under pressure from asset growth and dividend payouts.