by Standard & Poors
banking groups in Europe have been assigned a solid A+
to AA- average rating. The ratings indicate strong
creditworthiness of banks. However, the performance and prospects
of banks vary considerably. The Standard and Poor (S&P) long-term
rating for the majority of the 50 largest banking groups is stable.
rating for 18 of the 50 largest groups is negative, due to complex
domestic markets, decline in investment banking returns and increasing
risk charges outside home markets.
On the contrary,
4 financial institutions including UniCredito (A+/Positive/A-1),
Sanpaolo IMI (A+/Positive/A-1), Natexis Banques Populaires (A/Positive/A-1),
Credit Lyonnais (A-/Positive/A-2) have positive positions because
of development in their financial profiles, along with that of
the domestic markets. Germany is the most difficult banking market
in Europe, having half of the troubled banking groups.
2001 & 2000 results
of two-thirds of the 50 banking groups, which published their
reports, reveal that the pre-tax income of these banks during
2001 was moderately lesser than that in 2000. Retail banking showed
good results, but there was a downward trend in revenues from
corporate finance, asset management and equity lines of investment
for loan losses increased for majority of the banks, though the
average increase was moderate. The largest losses were contributed
by problems outside home markets, such as Argentina, Enron and
the high-yield market in the US. Italian banking groups were most
affected by these problems, resulting in a decrease in their rating.
The net new
provisions in loan losses to average loans ratio grew to an average
of nearly 60 basis points as reported by 33 of the 50 top banks.
The average annual rate of provisioning comprises a significant
measure of the trend of asset quality in Europe. The current provisions
rate is less than half when compared to 1991-93, which was the
most complex period in recent decades.
assigned by S&P account for the downtrend in financial performance,
which is unavoidable in the slow growth environment. Thus, most
European banks will be able to maintain their current rating levels,
despite simultaneously observing low performance.
credit risk provisions are expected to increase across Europe
in 2002, S&P does not predict a recurrence of the 1991-93
recession due to the following reasons: -
- The economic
downturn will be milder
- Banks are less exposed to commercial real estate market
- The debt service burden on borrowers is reduced due to lower
interest rate atmosphere
- Banks have shifted to retail business; some of the corporate
risk is thus moved to bond markets
- Banks are making better use of portfolio methods in credit risk
in Retail Banking Sector
banking in most European countries, comprising the consumer and
small and midsize business sectors, has turned around into a profitable
business. While Italy and France showed the highest performance,
Germanys private sector banks could not manage to achieve
even break-even performance.
primarily improved due to reduced costs, streamlining networks
and providing a wide range of products. The massive consolidation
process also contributed to the achievement. The key domestic
banking markets in Europe can be classified into three groups.
and Profitable Markets
and returns on capital in the first group of markets are generally
high, particularly in United Kingdom, Sweden, Spain, Denmark and
Ireland. The ratio of overhead to revenue is better due to the
cost controls implemented in these countries over the years.
market of Spain is among the most profitable in Europe. The conservative
policies of the Bank of Spain ensured that banks raised their
loan provisions level much above their problem loans. Banks in
Sweden and Denmark have attained extensive economies of scale
from consolidation. They have also applied state-of-the-art technology
to deliver retail banking services.
The UK, Spain
and Ireland also maintain a sound domestic market though they
had to cope with low housing prices.
improved the leverage in some banking groups, which ultimately
gave high returns to shareholders due to optimally utilised capital.
For instance the merger of Royal Bank of Scotland (AA-/Stable/A-1+)
and National Westminster Bank (AA-/Stable/A-1+) in the Royal Bank
of Scotland Group reflects a remarkable cost saving strategy.
group countries, Italy and France, have completely refurbished
their fundamentals. In the mid-1990s, the banking sector in these
countries was under recession. However, they are now in a better
position to manage any economic crisis.
market has shown significant development through mergers and acquisitions
and the pace of modernisation. Two major groups, UniCredito and
Sanpaolo IMI have reflected dynamic growth on par with their peers.
retail banking sector has also achieved a steady turnaround and
is now ranked among the top half in Europe. For example Credit
Lyonnais and Credit Industriel et Commercial are now assigned
The last group
consists of countries having difficult operating environments
such as Germany, Netherlands and Austria.
banking sector with its excess capacity is the most vulnerable.
The German domestic market is dominated by non-profit savings
and cooperative banks. The pre-tax profits of German banks for
the year 2001 will be considerably lower than those for 2000.
Most German banks have been assigned negative ratings.
banks have also failed in their consolidation attempts over the
past two years. In their effort to grab wholesale corporate and
investment banking markets outside Germany, the private sector
and Landesbanks achieved only moderate results. The ratings of
Bayerische Hypo-und Vereinsbank (A/Stable/A-1) and Commerzbank
(A/Negative/A-1) were recently downgraded.
are likely to continue receiving strong support from the state
governments over the years. However, S&P predicts that the
required improvements may not be implemented due to conflict of
interests between the banks owners.
is also one of the toughest markets in Europe, though the scenario
here is not as bad as that of Germany. Dutch banks have developed
from their relatively small and mature home market through expansion
diversification. This has had mixed results on their profitability
and risk exposures.
Corporate and Investment Banking
groups, which have expanded their corporate and investment banking
businesses recently, are the most effected due to global economic
downturn and fall in equity markets. The worst hit are the banks
international operations in wholesale corporate banking, investment
banking. The retail commercial business also suffered, particularly
due to exposure to Argentina.
and investment banks showed a downward trend in their performance
in the second half of 2001, compared to the first half. Corporate
finance, including equity underwriting, M&A advisory, venture
capital and equity brokerage performed badly.
prices, and limited growth in revenues from percentage-based fees
in private banking and asset management led to reduction in investment
portfolios of clients. More over, losses from Enron, the airline
and telecommunications industries added to the blow.
banking returns are directly linked to the market situation. Groups
that added costs mostly from acquisitions, such as the purchase
of Donaldson, Lufkin & Jenrettee by Credit Suisse Group in
August 2000 are now facing difficulties in managing the overheads
in less favourable markets.
to S&P, among the banks that developed international corporate
and investment banking businesses, Credit Suisse Group (AA-/Negative/A-1+),
ABN AMRO (AA/Negative/A-1+) and Commerzbank (A/Negative/A-1) are
under pressure and their long-term ratings have been downgraded.
Deutsche Bank (AA/Stable/A-1+) and UBS (AA+/Stable/A-1+) are also
facing heavy costs but are better positioned from their peers.
in operational efficiency
commercial banking business has gradually improved its efficiency
but the operations efficiency of corporate and investment banking
has been disappointing especially in 2001.
of the 41 largest European retail commercial banking groups and
9 corporate and investment banking groups over a period of 8 years
from 1994-2001 shows that while the former group has reduced their
average cost-to-income ratio by over 6 percentage points, the
latter increased it by around 7 percentage points during the period.
large and profitable retail operational groups, BNP Paribas (AA-/Stable/A-1+)
and Barclays (AA/Stable/A-1+) reflect low and improving operating
and investment banking businesses are cost intensive and difficult
to manage through market cycles. S&P predicts a low business
during 2002 for these groups. Basically, the capacity to manage
cost and single-party concentrations plays a key role in assigning
ratings to corporate and investment banking groups.