banks western europe fitch ratings 2020 outlook: western...

Financial Institutions Banks

Western Europe

Outlook │ 5 December 2019 Fitchratings.com/Outlooks 1

Weaker Growth and Low Interest Rates to Challenge Banks Fitch’s Sector Outlook: Negative Fitch Ratings revised the sector outlook for western European Banks to negative as it believes that the deteriorating outlook for GDP growth combined with low interest rates will pressure revenue

generation and make it challenging for banks to reach profitability targets. We expect a normalisation of credit losses from their cyclically low levels, but believe that asset quality

deterioration should be manageable for banks. We do not expect a sharp rise in non-performing loans (NPLs) as borrower affordability is aided by low interest rates.

While the sector outlooks for the region as a whole and for Germany and the UK are negative, sector outlooks in many countries remain stable. This is because we expect banks that operate in

more concentrated banking sectors to be able to withstand the revenue challenges better, and business models that benefit from geographic and business diversification will prove more

resilient. We also expect the banks in southern Europe to continue their progress in reducing problem assets.

Rating Outlook: Negative The Negative Outlook is driven by the Negative Rating Watches on the UK banks’ Long -Term

Issuer Default Ratings (IDRs). These were put in place in March 2019 to reflect the downside risks of a no-deal Brexit. Negative Outlooks on several Italian banks reflect the Negative Outlook on the

sovereign rating.

Outside these two countries, the majority of Outlooks remains stable (just above two-thirds), but

in 2019 Fitch revised some Outlooks to Negative to reflect increasing pressure on earnings that will make it more challenging for banks to meet performance targets and has forced some of them

to revisit their business plans. Despite the increasingly challenging operating environment, upgrades outnumbered downgrades in 2019, albeit by a smaller margin than in 2018, primarily reflecting improved asset quality.

What to Watch

Banks will continue to focus on cost cutting given revenue challenges, but this will require

strong execution skills in a more difficult environment.

Inflows of new NPLs remain low, but a turning credit cycle will expose banks with weaker underwriting standards that have not been tested through an economic cycle.

Political risks remain material as the outcome of Brexit remains unclear and because the region is exposed to the trade dispute between China and the US given direct and indirect trade links.

Strengthening controls to mitigate non-financial risks, including misconduct and cyber-risks,

will remain high on banks’ agendas. In the longer term, this should reduce the risk of large losses.

Christian Scarafia, Co-Head Western European Banks

"Fitch expects the Western European banks to respond to revenue challenges in 2020 with further rounds of cost-cutting programmes.

Banks with sound business models and less reliance on net interest income will better withstand these pressures. Banks that still have to

restructure their businesses will see greater challenges. A lot will depend on whether downside risks to economic growth materialise as

tight margins do not leave much space for higher credit losses.”

Fitch Ratings 2020 Outlook: Western European Banks

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2013 2014 2015 2016 2017 2018 YTD19

Upgrades (LHS) Downgrades (LHS) Down/up (RHS)

Note: Only banks with Viability Ratings, one bank per banking group per countrySource: Fitch Ratings

Western European Banks - Rating Changes

50(No.) (x)

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AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ andlower

(%)

Note: Only banks with Viability Ratings, one bank per banking group per countrySource: Fitch Ratings

Western European Banks - Rating Distribution

https://your.fitchratings.com/outlooks-2020.html


Western Europe


Greater Appetite for Negative Rates on Deposits While banks have started charging institutional and corporate customers for their deposits,

charging households remains taboo in most countries. However banks in some countries have increased or are expected to increase account fees, in particular in countries where it is illegal to

charge negative rates. Others are considering charging interest to their retail customers or have already started passing on the cost of negative rates to their wealthier retail customers.

Asset Quality Unlikely to See Sharp Deterioration Despite the weaker outlook for GDP growth, Fitch does not expect a sharp rise in NPLs in 2020.

Low interest rates support borrower affordability and unemployment rates remain low. In southern Europe, we expect banks to continue to reduce their legacy NPLs, and low interest rates

should support investor interest in NPL disposals. Nevertheless, expected credit losses have become more volatile since the introduction of IFRS 9, and increases driven by weaker forward

economic guidance would eat into the banks’ already thin margins.

Non-financial Risks Remains High on Banks’ Agendas Banks will continue to incur sizeable costs to strengthen controls for misconduct and cyber-risks. Fitch expects that the authorities’ increased focus on anti-money laundering (AML) controls will

likely lead to the discovery of further cases. In the longer term, however, more stringent regulation will be positive and should result in more sustainable business models. Banks will also continue to

make significant investments to strengthen system resilience and improve cyber protection. This will remain an ongoing effort given the increasingly sophisticated nature of threats and effective

protection will require cooperation across the sector and involve the authorities.

Macro-Environment Sensitive to Political Risk The trade dispute between the US and China has affected western European GDP growth and the final outcome of Brexit has given rise to further uncertainties that affect investment decisions. A

rapid recovery of the German economy, which avoided a technical recession in 3Q19, could result in a more supportive economic environment in western Europe. Further hits on exports could test

the economies of those countries where economic growth to date has proven more resilient and pose further headwinds for the banking sector.

Will Sector Consolidation Gain Pace in 2020?

Revenue pressure and the need to sustain further heavy investment costs will encourage European

banks to take a hard look at opportunities for business combinations. Fitch believes that mergers can be credit positive if they result in a combined bank with a sound business model, where

operating efficiency improves quickly. The challenges to executing a merger successfully are sizeable, however, and banks will evaluate whether they can realise synergies or efficiency by other

means, which could result in an increasing number of cooperation agreements with banks and other financial institutions. Removing excess capacity in a banking sector should be positive for

asset margins, but in the current low interest rate environment it is difficult to see a sustainable improvement, particularly in countries that see strong competition from non-domestic banks.

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LBG SAN HSBC UBS ING BBVA DANSKE SC CA INTESA RBSG SG BNPPUNICREDITBARC CS GBPCENORDEA CBK DB

Large European banks (LHS) Large European banks median 9M19

Source: Fitch Ratings, Banks

Operating Profit/RWAs

(% RWAs)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

IE GR

DK

BE

ES

LU

NL

SE

AT

DE

GB

FR

PT IT

(%)

Lending margins for home purchases September 2019 Lending margins for NFCs September 2019

Lending margins for home purchases December 2016 Lending margins for NFCs December 2016

Euro area countries refer to loans to euro area residents, non-euro area countres rates refer to loans to domestic residents.Source: ECB

Lending Margins of MFIs

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LU

NO

GB

DE FI

DK

NL

BE

AT

FR

EU ES IE IT PT

(%) Max. (2014-2018) Min. (2014-2018) End-June 2019

Note: Greece: Max. 2014-2018: 46%, Min. 2014-2018: 40%, End-June 2019: 39%. Source: Fitch Ratings, EBA

Non-performing loans/Gross Loans



Western Europe


Austrian Banks Stable Rating and Sector Outlooks The stable sector and rating outlooks reflect our view that the Austrian banking sector is well

prepared to face the economic slowdown expected across the eurozone in 2020, thanks to the major banks’ significant strengthening of their balance sheets and revenue generation in the last

five years. The banks should continue to benefit from a resilient Austrian economy and sound economic growth in core central European countries.

Strong Profitability Likely to Persist in 2020 The major Austrian banks’ profitability is likely to remain strong and well above its cyclical average

in 2020. This should allow the banking sector to accommodate robust loan growth while maintaining sound capitalisation, which compares favourably with large European peers’. We

expect declining loan growth, higher margin pressure in the banks’ home markets and slightly higher loan impairment charges (LICs) to moderately affect profits.

Impaired Loan Ratios at Cyclical Low The sector’s impaired loans ratio should improve on the back of the favourable economic

environment, low interest rates and loan growth. We expect NPL volumes and LICs to rise moderately towards the end of 2020 amid a deterioration of the economic outlook in western

Europe and in Germany in particular. However, these should remain manageable in the medium term as Austrian corporates and SMEs have built up material capital and liquidity buffers in a

decade of strong economic recovery and CEE economies are generally more resilient than in 2008.

Increasing Margin Pressure in Austria Additional margin pressure from the ECB’s last interest rate cut and increasing competition in Austria remain a challenge for those banks that are not geographically diversified. About 60% of

the Austrian banks’ loan books consist of variable rate loans, which means that their interest income will be less affected by higher-rate loans maturing than in other countries. Large

diversified banks with a significant share of foreign revenues, in particular from outside the eurozone, should continue to benefit from higher interest rates and lower price competition.

Cash-rich corporates and households’ sound savings rates should continue to generate a robust

inflow of deposits that has to be put to work. Austrian banks are not allowed to pass on negative rates to mass retail clients and therefore need to increase fees on deposit accounts and convince

their risk-averse domestic retail clients to shift some of their deposit balances to asset management products to alleviate pressure on net interest income.

Loan Growth Likely to Decelerate Banks were able to mitigate margin pressure by growing their loan books. Strong demand from

Austrian corporates and SMEs has fuelled loan growth over the past three years, as businesses took advantage of the favourable credit environment. Austrian businesses should have pre -funded

a large share of their investment needs and we expect corporate loan growth to slow down.

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Op. ROAE 1H19 (LHS)Op. profit/RWAs 1H19 (RHS)Op. ROAE avg. 2014-2018 (LHS)Op. profit/RWAs avg. 2014-2018 (RHS)

Source: Fitch Ratings, banks

Profitability at its Peak

(%) (%)

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Total capital ratio (LHS)CET1 ratio (LHS)CET1 SREP requirement (LHS)Leverage ratio (RHS)


Adequate Capitalisation and Leverage

(%) (%)

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Min. (2014-2018) Max. (2014-2018) June 2019


NPL Ratios at Cyclical Low

(%)

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a-

a

a+

0 20 40 60

Source: Fitch Ratings

Geographic Diversification SupportsVRs

(Foreign business in % of revenues)

VBV

BAWAG

Erste

-25

0

25

50

-1

0

1

2

2015 2016 2017 2018 2019

Corporate loan growth (LHS)

net share of banks facing strongercorporate loan demand (RHS)

Source: Fitch Ratings, Austrian National Bank

Loan Growth Likely to Decelerate4-month moving averages

(%)(%)

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CompanyProfile

Management& Strategy

Risk Appetite

Asset QualityEarnings &

Profitability

Capitalisation& Leverage

Funding &Liquidity

2019 2016


Improved Credit ProfilesAverages of bank-specific VR scores

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Data for Erste Group Bank AG (Erste), Raiffeisen Bank International AG (RBI), UniCredit Bank Austria (UBA), BAWAG Group, Volksbanken-Verbund (VBV)



Western Europe


Benelux Banks Sector Outlook Stable The stable sector outlook reflects our expectation that Benelux banks will maintain sound asset

quality and solid capitalisation in 2020 despite a less supportive macroeconomic backdrop. Fitch expects low-for-longer interest rates and cost pressures to challenge the banks' resilient earnings,

especially those banks with less geographical diversification or with higher dependence on interest income. Profitability may also suffer from the eventual normalisation of LICs, although we

expect them to remain low to moderate in the near term. We believe that macro-prudential measures announced by the Belgian and Dutch authorities will increase the banks' resilience to a

downturn in the housing market in the long term.

Increased Revenue Pressure We expect a more difficult revenue environment from low interest rates to penalise most Benelux banks. Moderate loan growth, disciplined loan pricing aided by the concentrated nature of the

banking sectors in the Benelux, selective pass-through of negative rates on to customers and focus on fees and commissions should partly mitigate earnings pressure. We expect banks with more

diversified business models and larger international operations to be better positioned to cope with revenue challenges as growth opportunities in the domestic markets are more limited.

Cost Discipline Key to Profitability Operating expenses will remain affected by the required investments in growth and digitalisation,

and in the case of Dutch banks, by higher spending on customer due diligence and non-financial risk controls amid increased regulatory scrutiny. The banks’ cost reduction initiatives may not fully

offset these pressures in all cases. Combined with revenue headwinds, this means that the banks will struggle to meet their efficiency targets in 2020.

Asset Quality to Remain Sound We expect asset quality metrics to remain stable. LICs picked up in 2019 from historical lows and

could rise further, but we expect them to remain below the through-the-cycle average as economies in the banks’ main markets continue to grow, albeit at a slower pace. Potential pressure

from exposures to less stable economies (i.e. Turkey for ING and BNPPF, and certain countries in central and eastern Europe for KBC) should be contained due to the moderate size of affected

exposures and the banks' robust risk controls.

New Measures Aimed at Tackling Risks in Mortgage Lending Markets Stretched affordability due to rising house prices and increasing household debt led the Belgian and Dutch regulators to propose a set of new prudential measures which are expected to be

implemented in 2020. A more conservative LTV ratio at origination in Belgium and a risk-weight floor for mortgage lending in the Netherlands are among the key proposals. Stricter origination in

Belgium should curb credit demand for riskier loans, eventually reducing the risk on the banks’ balance sheets. Risk-weight floors in the Netherlands will partly front-load the impact of Basel III

end-game rules, which would otherwise have been subject to a long phase-in. We believe Dutch banks are well-prepared to absorb the impact in light of their healthy capital ratios.

Data for ABN AMRO Bank N.V. (ABN), ING Group N.V. (ING), Cooperatieve Rabobank U.A. (Ra bo), de Volksbank N.V. (dVolksb), Belfius Bank SA/NV (Belfius), KBC Group N.V. (KBC), Banque Internationale à Luxembourg SA (BIL).

Ratings Outlook/Watch (As of December2019)


Stable89%

Negative11%

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Operating Profitability

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a End-2018 for BNPPFSource: Fitch Ratings, banks

Capitalisation and Leverage(End-June 2019ᵃ)

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Min. (2014-2018) Max. (2014-2018) End-Jun 19


Impaired Loans/Gross Loans

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125 150 175 200 225 250 275

ABN ING Rabo deVolksb Belfius

BNPPF KBC BIL Implied C/I

Transparent bubbles: FY16; solid bubbles: 12 months to end-June 2019. Bubble size depicts LICs/av. gross loans (negative for both data points for de Volksbank and ranging between 4bp and 25bp for other banks). C/I: Cost/IncomeSource: Fitch Ratings, Banks

(Costs/avg. assets (bp))

(Revenues/avg. assets (bp))

70%

60%

50%

LICs Still Low Enough to Offset Cost and Revenue Pressure



Western Europe


French Banks Stable Sector Outlook as Banks are Resilient to Headwinds French banks will remain resilient to low interest rates and a softer economy in 2020. We expect

loan quality to continue to gradually improve and LICs to remain in the same range as in 2019. French banks should continue to accumulate capital in light of the finalisation of Basel III. Although

we do not expect major acquisitions, the banks will continue to perform bolt-on acquisitions to further expand their franchises, notably in countries outside the eurozone, in asset management,

payments or leasing, with limited exposure to interest rates.

Levers to Offset Earnings Pressure Low interest rates should continue to pressurise retail and commercial banking revenue and the banks use different levers to offset this. In contrast to 2019, the sector should be able to increase

retail banking fees in 2020 after a year of stability agreed with the government and caps applied to financially vulnerable customers. A 25bp reduction in regulated savings (Livret A) rates could be

decided in 2020, which would benefit funding costs.

Cost efficiency programmes launched a few years ago by almost all banks will start to bear fruit in 2020. The ECB deposit tiering will also have a marginally positive impact on profitability as banks

maintain large central bank deposits.

Improvement in Asset Quality Impaired loan ratios should continue to decline in 2020 to below 3%, as we forecast contained new inflows in the context of slow but still positive economic growth, and interest rates maintained at a

low level. LICs should remain in the same range as in 2019, at about 25bp of gross loans for the sector. Non-financial corporate debt is rising as a percentage of GDP, but is not a significant risk at

this stage when considering net debt. Household debt is in line with the eurozone average and significantly below the UK and the US.

Slower Loan Growth Loan growth should slow in 2020 compared with the 6% recorded in 2019 owing to stretched

household affordability and lower credit demand from corporates due to geopolitical uncertainties. The increase in the countercyclical buffer applied on French exposure to 0.5% from

0.25% in April 2020 and policy decisions expected from the French authorities on housing loans may also help to limit lending volumes. We do not expect major loosening in underwriting criteria,

although we note a slight relaxation for housing loans, with lower downpayments, longer maturities and higher debt-service-to-income (DSTI) ratios.

Capital Accumulation We expect the banks to continue to accumulate common equity Tier 1 (CET1) capital in the

context of the Basel III end-game from 2022. However, we expect capital trajectories to remain divergent between the better capitalised cooperative groups and other banks, which face greater

pressure for return on equity.

Ratings Outlook/Watch (As of December 2019)


Stable100%

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BN

PP

CA

CM

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ea

GB

PC

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LB

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SG

(%)(%)



Moderate but Stable Profitability

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CA

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(%)(%)



Increasing Capital Buffers(End-June 2019)

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BN

PP

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Ark

ea

GB

PC

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SG

(%)Min. (2014-2018) Max. (2014-2018)June 2019


Improving Loan Quality(Impaired loans/gross loans)

0

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BN

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CA

CM

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PC

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SG

Individuals (LHS) Corporates (LHS)Total loan growth (LHS) French loan book (RHS)


(EURbn)(1H19/1H18 loan growth (%))

Strong Domestic Loan Growth

25

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32

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Avg. loan amount at origination (LHS)

DSTI ratio (RHS)

Source: Fitch Ratings, ACPR

Lower Homebuyers' Affordability

(EUR 000) (%)

Data for BNP Paribas S.A. (BNPP), Credit Agricole (CA), Credit Mutuel Alliance Federale (CMAF), Credit Mutuel Arkea (Arkea), Groupe BPCE (GBPCE), La Banque Postale S.A. (LBP) and Societe Generale S.A. (SG).



Western Europe


German Banks Negative Sector Outlook Reflects Poor Earnings as Operating Environment Weakens The large German banks’ stubbornly weak operating profitability is unlikely to improve materially

in 2020. This makes the sector more vulnerable than most north European peers to the increasingly adverse operating environment. As Fitch expects the German economy to grow by

only 0.9% amid lingering global trade uncertainties, German banks will find it increasingly difficult to maintain the robust loan growth that helped them contain margin erosion in the last two years.

Limited Room for Manoeuvre in the Absence of Healthier Market Discipline The options available to address the earnings pressure are unlikely to provide relief in the short

term. Cost-cutting progress is stalling, which is prompting a series of staff reduction plans that will weigh on profits in 2020. The updated restructuring plans launched earlier this year by the two

largest banks are also driving short-term execution risk. Asset quality should remain strong in the foreseeable future, even though the corporate sector’s credit quality is showing isolated signs of

weakening for the first time in almost a decade. However, even a modest increase in LICs has the potential to more than offset efficiency gains, and a normalisation up to the long -term average

would absorb most of the large banks’ current pre-impairment income.

The ECB’s guidance that interest rates will remain low for longer creates a strong incentive to pass on negative rates to mass-affluent depositors soon. Banks are still shying away from penalising

mass-retail clients, but the ECB’s guidance is likely to prompt them to cautiously break this taboo. Reinvestments of maturing liquid assets exacerbate the margin pressure given the rising stock of

high-quality (especially German public sector) assets that yield negative returns.

Paradoxically, a sudden and severe recession could turn out to be salutary if the sector reacts by sustainably restoring adequate pricing discipline, the lack of which is a major cause of the

entrenched earnings issue. As this scenario appears unlikely in the short term, we expect the large banks to continue to chase market shares to make up (with very limited success) for their inability

to improve their revenue per client to a level more commensurate with their European peers.

Compared with large European peers, most German banks lack the business model and geographic diversification that could mitigate the revenue attrition in domestic lending. We remain sceptical

of the potential of large-scale mergers to bring durable relief as the low barriers to entry enable foreign banks and, increasingly, fintechs to close gaps left by the removal of excess capacity.

Weak Internal Capital Generation Has Already Begun to Erode Capital Ratios German banks’ average fully loaded CET1 ratio (EBA sample) remains a relative rating s trength,

although it has been slowly declining since 2018 and dropped slightly below the European average of 14.4% in 2Q19. After years of deleveraging, sector-wide RWA growth reappeared in 2018 and

1H19 as the compression of interest margins incentivises above-average loan growth. In addition, the potential available for model-driven RWA optimisation is likely to be largely exhausted, and

years of improving credit quality have left little room for further positive rating migration.

Data for Deutsche Bank (DBK), Commerzbank (CBK), UniCredit Bank (HVB), Genossenschaftliche FinanzGruppe (GFG), Sparkassen-Finanzgruppe (SFG), Sparkassen-Finanzgruppe Hessen-Thueringen (SFG-HT), Landesbank Baden-Wuerttemberg (LBBW), Bayerische Landesbank (BayLB).



Stable76%

Negative19%

Evolving5%

0.0

0.4

0.8

1.2

1.6

0

4

8

12

16

DB

K

CB

K

HV

B

GF

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SF

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G-H

T

Bay

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BW

(%)(%)

Op. ROAE 1H19 (LHS)ᵃOp. profit/RWAs 1H19 (RHS)aOp. ROAE avg. 2014-2018 (LHS)Op. profit/RWAs avg. 2014-2018 (RHS)

ᵃ GFG, SFG, SFG-HT: 2018Source: Fitch Ratings, banks


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(%)(%)

Total capital ratio (LHS)ᵃCET1 ratio (LHS)ᵃ2019 CET1 SREP req. (LHS)Leverage ratio (RHS)ᵃ

ᵃSFG-(HT), GFG at YE18Source: Fitch Ratings, banks

Capitalisation and LeverageEnd-June 2019

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Bay

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(%) Min. (2014-2018) Max. (2014-2018) June 2019



DBK

GFG

SFG

bbb

bbb+

a-

a

a+

aa-

0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7%

ᵃ GFG and SFG: 2018


Depressed Profitability Constrains Viability Ratings

(Operating profit/average total assets 1H19ᵃ)

CBK

HVB

BayLB

LBBW

(Viability Ratings)



Western Europe


Greek Banks Positive Sector Outlook as Banks Progress on Asset Quality Clean-up The positive sector outlook reflects our expectation that the banks’ credit risks, albeit still very

weak, will further improve in 2020 as the reduction in the stock of non-performing exposures (NPEs) continues.

We view current plans of reducing NPE ratios in the next few years as achievable although

execution remains highly sensitive to the continued supportive domestic economic environment, the effectiveness of the legal framework, and investor appetite for Greek distressed assets. The

banks’ NPE reduction plans include a combination of portfolio sales, securitisations and restructuring solutions.

Fitch has a Positive Outlook on Eurobank’s Long-Term IDR as the bank’s asset quality is expected

to improve substantially over the next year and ahead of peers.

System-wide Solutions to Potentially Accelerate Reduction of NPEs We expect the banks to make use of the recently approved “Hercules” Asset Protection Scheme, which will be an additional tool to accelerate asset quality clean-up by providing a state guarantee

on senior tranches of NPE securitisations. Other solutions under debate, such as the proposal by the Bank of Greece to offload NPEs along with part of the deferred tax credits, while still

uncertain, could become another relevant tool to work out NPEs.

Reduction of Capital Encumbrance The banks’ capitalisation remains highly vulnerable to asset quality shocks, although we expect capital encumbrance from unreserved NPEs to gradually reduce in line with asset quality

improvement. Internal capital generation will remain weak despite some improvement in profitability. We do not expect the banks to issue meaningful volumes of unsecured debt as the

MREL has not been communicated yet. However, the banks may issue loss-absorbing debt to enhance regulatory capital buffers if market conditions are favourable, as some did in 2019.

Profitability Still Under Pressure We expect earnings to improve slightly supported by some growth in fee income, new lending

opportunities, especially in the corporate segment, and cost-containment measures. However, balance sheet de-risking, reduction in margins and continued high LICs will continue to put

pressure on profitability in 2020.

Building Liquidity Buffers The banks’ funding positions should continue to improve in 2020 supported by deposit inflows, improved access to market funding and balance sheet de-risking. We expect the banks to further

build up liquidity buffers as these are still fairly low.

NPE Reduction Plans

End-June 2019

NPE ratio (%)

NPE coverage (%)

NPE ratio target

Eurobank 32.8 55 ~9% by end-2021

NBG 36.5 56 ~5% by end-2022

Alpha 48.1 47 ~13% by end-2022

Piraeus 51.4 48 ~9% by end-2023


-6

-5

-4

-3

-2

-1

0

4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

Sales Write-offs Net new NPEs

Aggregate data for the four systemic banks. NPE flows are domestic for all banks except for Eurobank (Group basis)Source: Fitch Ratings, Banks

NPE Evolution(EURbn)

0

5

10

15

0

5

10

15

20

Eurobank NBG Alpha Piraeus

(%)(%)

Total capital ratio (LHS)

CET1 ratio (LHS)

CET1 SREP requirement (LHS)

Leverage ratio (RHS)


Capitalisation and Leverage(End-June 2019)

NBG

Alpha

Piraeus

0% 50% 100% 150% 200% 250% 300%


b

cc

ccc-

ccc

ccc+

b-

Unreserved NPEs/Fully-Loaded CET1(End-June 2019)

(Viability rating)

Eurobank

-3

-2

-1

0

1

2

-30

-20

-10

0

10

20

Eurobank NBG Alpha Piraeus

(%)(%)




Deposits83%

ECB3%

Funding Structure(End-June 2019)

Aggregate data for the four systemic banksSource: Fitch Ratings, Banks

Other (excl. derivatives)

2%

Interbank repo8%

Debt securities

4%

Data for Eurobank Ergasias S.A., National Bank of Greece S.A. (NBG), Alpha Bank AE and Piraeus Bank S.A.



Western Europe


Irish Banks Sector Outlook Stable, But Disruptive Brexit Remains a Risk Still positive labour market and domestic consumption trends, an expanding mortgage market and

growing population and a healthy large corporate sector should continue to support lending opportunities for banks and their revenues in 2020. The weaker-than-expected credit demand

from the domestic SME sector seen in 2019 is likely to persist in the first few months of 2020, until there is some clarity over the likely outcome of Brexit. Brexit remains a risk for growth, with a

disruptive withdrawal of the UK from the EU likely to result in a material and immediate slowdown of the economy. Borrowers in certain economic sectors (agri-food, those dependent on UK

import/exports) would be most affected.

Bank Ratings Reflect Sustained NPL Reduction, MREL Build-up The two large Irish banks, AIBG and BOIG, are both rated firmly investment grade, which reflects the sustained reduction of the groups’ legacy problem loans. The ratings of the groups’ operating

companies reflect the build-up of debt buffers that provide protection to senior creditors: Allied Irish Banks plc’s (AIB) Long-Term IDR is already rated one notch above its Viability Rating and the

Long-Term IDR of Bank of Ireland (BOI) is on Positive Outlook to reflect our expectation that its ratings will be upgraded once the senior debt received from its parent holding company becomes

junior to its external senior obligations. UBI’s Long-Term IDR is based on support from The Royal Bank of Scotland Group plc, and is currently on RWN in line with its UK parent, reflecting the risk

of a disruptive Brexit.

Stable Interest Rates, Cost Reductions, Normalised LICs We expect lending rates to remain broadly stable thanks to the largest banks maintaining pricing discipline, despite some second-tier banks attempting to gain mortgage market share by applying

competitive pricing. We expect the focus on cost reductions to increase in 2020 as part of the next strategic cycles, partly through reducing staff levels and improving efficiency. LICs are back to

normalised levels and we expect them to remain stable in the absence of a disruptive Brexit.

Banks Working on Further Asset Quality Improvements Banks are willing to reduce legacy NPEs further and aim to reach (or even beat) European averages in the medium term, after achieving gross NPE ratios of around 5%. The effectiveness of

workout and restructuring efforts is slowing as the banks are left with granular books of defaulted borrowers unwilling to engage with the lenders. We expect the banks to plan more portfolio sales

in 2020, but the owner-occupied exposures that remain may be more difficult to sell, while there is no benchmark pricing for these. Low inflows of new impaired loans continued to underpin asset

quality performance in 2019, but this might revert in the case of a disruptive Brexit.

Robust Capital Ratios, Comfortable Liquidity We expect the banks to continue to operate with capital ratios comfortably above requirements, despite some modest erosion that could result from returning a portion of excess capital to

shareholders, or selling NPEs at a slight loss. We expect deposit bases to remain stable.

Ratingsᵃ Outlook/Watch (As of December 2019)

a Holding Companies' Ratings where applicableSource: Fitch Ratings

Stable67%

Negative33%

0

1

2

3

0

5

10

15

AIB

G

BO

IG

UB

I

(%)(%)


Source: Fitch Ratings, banks, end-2018 figures for UBI


0

10

20

30

40

50

AIB

G

BO

IG

UB

I

(%)

Min. (2014-2018) Max. (2014-2018)

June 2019



bb-

bb

bb+

bbb-

bbb

bbb+

0 5 10 15

Source: Fitch Ratings, end-2018 for UBI

Asset Quality Key to Ratings

(Impaired loan ratio at end-June 2019 - %)

BOIG

AIBG

UBI

0

5

10

15

20

0

20

40

60

80

AIB

G

BO

IG

UB

I

(%)(%)


Source: Fitch Ratings, banks, end-2018 for UBI

Capitalisation and Leverage(End-1H19)

-10

-5

0

5

10

2016 2017 2018 1H19

AIBGBOIGUBIIreland real GDP growth

OpCos' data for end-2016Source: Fitch Ratings, banks

Positive Growth AchievedAt the largest two banks

(%)

Data for AIB Group Plc (AIBG), Bank of Ireland Group Plc (BOIG), Ulster Bank Ireland DAC (UBI).



Western Europe


Italian Banks Sector Outlook Back to Stable Fitch has revised the sector outlook for Italy to stable from negative, where it had been since 2017

because we expect the performance of Italian banks to have stabilised. Pressure on revenues from persistently low interest rates and weak lending demand from the domestic corporate and SME

sector will persist, but stronger asset quality, regardless of the lack of economic growth, and stronger NPL coverage should help to keep LICs under control and underpin profitability.

Banks with diversified business models that generate good levels of fees and commissions, which

include UniCredit and Intesa as well as the smaller Credito Emiliano, will perform better than competitors that rely on traditional lending businesses. The combination of improved funding

access and renewed central bank long-term facilities should help keep funding costs stable, but the ECB deposit tiering will provide only minimum relief.

Negative Sovereign Outlook Reflected in Bank Ratings The Negative Outlook on Italy’s sovereign rating drives the Negative Outlooks for six Italian banks

and continues to represent the main ratings sensitivity for Italian banks. In most cases, where a Negative Outlook is assigned, the banks are rated at the same level or higher than Italy. These

Outlooks reflect our view that the banks are likely to be downgraded if Italy is downgraded.

Cost Reductions Crucial For Profits For some years Italian banks been concentrating on reducing their cost bases. With opportunities to increase revenues constrained by the low interest rate environment and sluggish loan growth,

further cost cutting remains crucial to protect earnings. This is especially true for those banks with limited business or revenue diversification. However, some cost items, in particular personnel

costs, require onerous upfront charges before achieving long-term savings, while insufficient scale makes it difficult to achieve meaningful efficiency gains for the smaller banks.

NPL Reductions Expected to Continue We expect a further reduction of legacy NPLs. Disposals will continue and are likely to increasingly

include unlikely-to-pay-exposures. We expect that effective workout and restructuring and low inflows of new impaired exposures will drive further asset quality improvements, given that

growth prospects for Italy’s economy, albeit anaemic, look a little more favourable in 2020 and impaired loan inflows are at cyclical lows.

Improved Funding To Continue Absent Sovereign Shocks Access to funding has improved in 2019 and banks, including smaller institutions, have issued

across the capital structure. We believe that pricing and, for weaker issuers, access to funding will remain confidence sensitive. In the absence of major sovereign-related market tensions, we expect

funding access for the banks to continue unchanged and banks to execute their funding plans, which will include increased MREL issuances. TLTRO III drawdowns will start in 2020 to partly

refinance maturing TLTRO II facilities.



Stable43%

Negative43%

Positive14%

b-

b

b+

bb-

bb

bb+

bbb-

bbb

0.0 1.0 2.0 3.0

Source: Fitch Ratings, 2018 figures for BNL

Operating Profit/RWAs

(Ratio for 1H19)

MediobUniCredit

Intesa

UBI

MPS

BPER

SondrioBNL

0246810

0

10

20

30

Un

iCre

dit

Inte

sa

MP

S

UB

I

BN

L

Me

dio

b

BP

ER

So

nd

rio

(%)(%)


Source: Fitch Ratings, banks, end-2018 for BNL


05

10152025303540

Un

iCre

dit

Inte

sa

MP

S

UB

I

BN

L

Me

dio

b

BP

ER

So

nd

rio

(%)

Min. (2014-2018) Max. (2014-2018) June 2019

Source: Fitch Ratings, banks, end-2018 for BNL


UniCredit(EUR51bn)

IntesaSP(EUR61bn)

UBI(EUR11bn)

MPS(EUR17bn)

BPER(EUR9bn)

Mediobanca(EUR4bn)

Sondrio(EUR5bn)

BNL(EUR10bn)

0

100

200

300

400

0 20 40 60 80 100 120

(Net impaired loans/FCC (%))

The bubble size is the T-LTRO amount (EURbn) Source: Fitch Ratings

Capital Encumbrance to NPLs and Sovereign Risk, T-LTRO Exposure(Italian Sovereign debt/FCC (%))

Data for UniCredit S.p.A. (UniCredit), Intesa Sanpaolo S.p.A. (Intesa),Banca Monte dei Paschi di Siena S.p.A (MPS); Unione di Banche Italiane S.p.A. (UBI), Banca Nazionale del Lavoro S.p.A. (BNL), Mediobanca - Banca di Credito Finanziario S.p.A (Mediob), BPER Banca S.p.A (BPER) and Banca Popolare di Sondrio – Società Cooperativa per Azioni (Sondrio).



Western Europe


Nordic Banks Stable Sector Outlook Money laundering cases and earnings pressure will challenge the largely new management teams

of the major Nordic banks in 2020. The macro-economic drivers of banking income will be broadly stable. Compliance-related expenses will exert pressure on earnings, but efficiency and strategic

initiatives should gradually offset these pressures. Asset quality should remain sound. Fitch expects LICs to increase somewhat owing to higher downside macro risks, but to remain

contained. Overall, the banks should continue to report solid earnings generation.

Earnings, Money Laundering Investigations Weigh on Ratings The Negative Outlook on Nordea reflects the challenges to restore profitability in a slightly poorer performing environment. Uncertainties over the ultimate impact from their respective money

laundering cases drive Danske’s Negative Outlook and Swedbank’s Rating Watch Negative . The joint Swedish-Estonian investigation on Swedbank is expected to be completed in early 2020,

while no timeframe exists regarding Danske. SEB is also under inspection by the Swedish authorities, and, unlike Swedbank, the FSA has not opened a sanction case.

Geographic Differences Drive Revenue Momentum We expect that revenues will remain broadly stable, although geographic differences should

continue to influence the banks’ individual momentum. We have seen better volume growth and more stable margins in Norway and Sweden, which will continue. Norwegian and Swedish banks

should continue to outperform regional peers with large operations in Denmark and Finland. We expect investments in digitalisation and compliance functions to weigh on profitability, notably

(but not exclusively) for Danske and Nordea. Both banks recently unveiled new strategic updates to restore profitability. Danske expects a 5%-6% ROE in 2020, which is significantly below

regional peers. Nordea will seek to improve its current ROE of about 8% to above 10% by 2022.

Sound Asset Quality, LIC Normalisation Fitch expects asset quality to remain sound, despite higher downside risks to regional macroeconomic growth. Impaired exposures to oil and offshore sectors may increase moderately,

but this is manageable for the banks. LICs will increase somewhat from the current low levels, which will moderately increase profitability pressure.

Senior Non-Preferred Issuance to Accelerate In 2020-2021, Nordic banks will gradually replace most senior debt with senior non-preferred

(SNP) bonds to meet their MREL. In 2019, Swedish banks delayed SNP issuance owing to uncertainties over the size of SNP required. For Danske and Swedbank, SNP issuance increases

funding costs relative to peers, owing to wider credit spreads driven by money laundering concerns, which increases negative pressure on their respective earnings.

Higher Capital Requirements The Swedish and Norwegian FSAs plan to introduce risk-weight floors for commercial real estate

loans. Fitch believes that these measures, in addition to increasing countercyclical buffers, will increase capital requirements marginally, modestly strengthening the bank’s leverage ratios.



Stable73%

OutlookNegative

18%

Watch Negative9%

0

2

4

6

0

5

10

15

20

25

No

rde

a

Da

nsk

e

SE

B

SH

B

Sw

ed

Ny

kre

d

(%)(%)

Op. ROAE 9M19 (LHS)Op. profit/RWAs 9M19 (RHS)Op. ROAE avg. 2014-2018 (LHS)Op. profit/RWAs avg. 2014-2018 (RHS)



3.5

4.0

4.5

5.0

5.5

6.0

0

5

10

15

20

25

No

rde

a

Da

nsk

e

SE

B

SH

B

Sw

ed

Ny

kre

d

(%)(%)



Capitalisation and Leverage(End-Sep 19)

0

1

2

3

4

5

No

rde

a

Da

nsk

e

SE

B

SH

B

Sw

ed

Ny

kre

d

(%)

Min. (2014-2018) Max. (2014-2018)

September 2019



Nordea

SEBSHB

Swed

Danske

Nykred0

20

40

60

80

100

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

(Operating profit % risk-weighted assets (9M 19))


Profitability is Higher in Sweden and Norway

(% exposure to Sweden,Norway)

Data for Nordea Bank Abp (Nordea), Danske Bank A/S (Danske), Nykredit Realkredit A/S (Nykred), Skandinaviska Enskilda

Banken AB (publ) (SEB), Svenske Handelsbanekn AB ( SHB), Swedbank AB (Swed).



Western Europe


Portuguese Banks Steady Path to Recovery Drives Stable Sector Outlook The Portuguese banks will continue working out their declining stock of problem as sets in 2020.

They will now increasingly focus on digitalisation and improving cost-efficiency due to ongoing revenue pressure. The stable sector outlook also reflects an expected further reduction in the

banks’ capital encumbrance from unreserved problem assets to levels more in line with European peers. The Positive Outlook on BCP reflects improving asset quality and earnings.

Asset Quality Gradually Catching-Up With Southern European Peers We expect the sector will gradually converge to an impaired loans (IFRS 9 Stage 3 loans) ratio of

about 5%-6% over the next two to three years. Fitch estimates the ratio was around 9% at end-June 2019 and it should fall below 7% by end-2020. The improvement should come once again

from a mix of cures, sales and write-offs while loan growth will be in the low single digits. Loan loss allowance coverage of impaired loans should pick up from adequate levels of above 50%.

We expect the banks will curb risks from other problem assets in 2020, where progress was

limited before 2018. This means selling or reducing exposure to repossessed real estate, investment properties and restructuring funds. These assets still reached an aggregate net book

value above EUR9billion for the top six banks (40% of CET1 capital) at end-June 2019. The gradual improvement in asset quality and capital generation should continue to reduce the banks’ capital

encumbrance from unreserved problem assets, which still ranges from about 20% to more than 150%.

Business Models Challenged by Low Rates, Sector Consolidation Would Help Most business models are highly skewed towards domestic retail and commercial banking, where

revenue will likely remain under pressure for an extended period. The sector’s cost-to-income ratio remains better than the EU average at close to 55% in 1H19. However, we expect headwinds

from low interest rates, fierce competition in this overbanked market and limited credit growth prospects in Portugal. In that context, the banks will have to invest more in technology and

systems and redesign their business models in the short to medium term. They could achieve this by diversifying into fee-generating activities, producing income with leaner cost structures and

forming partnerships with other financial institutions. In the longer term, we believe the Portuguese banking sector will go through a new consolidation phase, which should result in more

resilient business models and ultimately be positive for the banks’ credit profiles.

Restored Capital Buffers, Manageable MREL Issuance Needs Portuguese banks’ solvency ratios generally remain at the low end of the EU, although some banks have restored moderate buffers above regulatory requirements. In 2019, some banks have

strengthened their headroom to total capital requirements by issuing Tier 2 and AT1 instruments. The focus will now shift to MREL compliance and we estimate that the six largest Portuguese

banks’ issuance needs add up to EUR7 billion to EUR9 billion. The banks will likely fill in those needs through a combination of senior non-preferred and senior preferred debt in order to

optimise funding costs, although approaches may differ due to their resolution strategies.



Stable80%

Positive20%

0

5

10

15

20

25

Ban

coB

PI

BC

P

Ban

co

Mtp

ioᵃ

CG

D

To

tta

(%)

Min. (2014-2018) Max. (2014-2018) June 2019

a Ratio for Banco Mtpio at end-June 2019 is pro-forma a portfolio sale in JulySource: Fitch Ratings, banks

Impaired loans/Gross Loans

0246810

05

10152025

Ba

nco

BP

I

BC

P

Ba

nco

M

tpioᵃ

CG

D

To

ttaᵃ

(%)(%)


a End-June 2019 for Totta's regulatory leverage ratioSource: Fitch Ratings, banks

Capitalisation and Leverage(End-September 2019)

2345678

0

50

100

150

200

BancoBPI

BCP BancoMtpio

CGD Totta

End-June 2019 (LHS) End-2018 (LHS)

Viability rating (RHS)

Capital encumbrance defined as (unreserved stage 3 loans + net foreclosed assets + investment properties + corporate restructuring and investment funds)/CET1 capitalSource: Fitch Ratings, Banks

Reducing Capital Encumbrance(Capital encumbrance, in % of CET1 capital)

bbb

bb+

bbb-

bb-b+b

-2

0

2

4

6

-10

0

10

20

30

Ban

coB

PI

BC

P

Ban

coM

tpio

CG

D

To

tta

(%)(%)




0

40

80

120

160

-50 -25 0 25 50 75 100

Banco BPI BCP Banco Mtpio CGD Totta

Source: Fitch Ratings, Bank

(LICs/pre-imp operating income, %)

(Total non-interest expenses/avg . assets, bp)

Net Reversals for Most Banks Supporting Profitability

Data for Banco BPI, Banco Comercial Portuguese, S.A. (BCP), Caixa Economica Montepio Geral (Banco Mtpio), Caixa Geral de Depositos, S.A. (CGD), Santander Totta SGPS, S.A. (Totta).



Western Europe


Spanish Banks

Stable Key Fundamentals The stable sector outlook reflects our expectation that Spanish banks will reduce problem assets

(non-performing loans and foreclosed assets) further, albeit at a slower pace, and strengthen capital buffers in 2020, particularly mid-sized banks. Profitability pressures will remain amid

persistently low interest rates, challenging banks with less diversified business models and revenues, and potentially reviving M&A options.

Resilient Operating Environment Sound economic growth supports a stable operating environment in Spain despite political risks.

GDP growth will slow to less than 2% in the next two years, which is still above that of the largest European economies, thereby helping the banks’ business prospects and asset quality.

Fee Income, Cost Discipline and Low LIC remain Profitability Levers Profitability will likely remain at current modest levels. We expect LICs to remain broadly

unchanged given they have reached the floor at most banks. Rising net commission income and further cost-cutting measures should help to counterbalance downward pressure in net interest

income.

The scope to reduce the cost of deposits is limited. In 2020, therefore the banks will have scope to protect margins mainly on the lending side. Despite some deceleration, new lending in the higher

yielding SME and consumer segments and to a lesser extent ECB tiering should partly offset some deleveraging in retail mortgage lending, pressure from low interest rates and high competition.

Asset Quality Improvement Slowing We expect Spanish banks to keep reducing the stock of problem assets, particularly mid-sized and

smaller banks which lag behind large domestic banks. As banks start to deal with more difficult problem assets to work out, the speed of reduction will slow. We also expect exposure to domestic

sovereign debt to remain significant, particularly at second-tier and smaller banks, favoured by the new TLTRO-III facility.

MREL Issuance Could Gather Pace We expect banks to reinforce their capitalisation in view of higher regulatory requirements,

including reducing capital encumbrance to unreserved problem assets. While large domestic banks and few mid-sized banks issued MREL-eligible instruments in 2019, we expect most mid-

size banks to follow suit in 2020 after receiving their MREL.

Litigation Risks Remain The EU Advocate General's recommendation that sales of Spanish residential mortgage loans linked to the IRPH index may have lacked transparency could present a risk to Spanish banks,

albeit in our view this is contained given the relatively low outstanding exposure to IRPH loans.



Stable86%

Negative5%

Positive9%

0

1

2

3

0

5

10

15

20

SA

N

BB

VA

Ca

ixaB

Ban

kia

Sa

ba

de

ll

Un

ica

ja

Ibe

rcaj

a

Ku

txa

(%)(%)




0

2

4

6

8

10

0

5

10

15

20

SA

N

BB

VA

Ca

ixaB

Ba

nk

ia

Sa

ba

de

ll

Un

ica

ja

Ibe

rcaj

a

Ku

txa

(%)(%)




0

5

10

15

20

25

SA

N

BB

VA

Ca

ixaB

Ban

kia

Sa

ba

de

ll

Un

ica

ja

Ibe

rca

ja

Ku

txa

(%)

Min. (2014-2018) Max. (2014-2018)

End-June 2019

a Non-performing loans and foreclosed assetsSource: Fitch Ratings, banks

Problem Asset Ratioᵃ

SANBBVA

CaixaB

Bankia Sabadell

UnicajaIbercaja

Kutxa

bb

bb+

bbb-

bbb

bbb+

a-

a

0% 10% 20% 30% 40% 50% 60%

Problem Assets: Non-performing loans and foreclosed assetsSource: Fitch Ratings, banks

Net Problem Assets/Fully Loaded CET1(End-June 2019)

(Viability rating)

Data for Banco Santander, S.A., Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), CaixaBank, S.A., Bankia S.A., Banco de Sabadell, S.A. Unicaja Banco S.A., Ibercaja Banco, S.A., Kutxabank, S.A. Ibercaja Banco, S.A. and Kutxabank, S.A.



Western Europe


Swiss Banks Stable Sector Outlook Balances Domestic Revenue Pressure with Sound Asset Quality With the policy rate set at -75bp, we expect pressure on net interest income in the Swiss market to

remain significant despite the Swiss National Bank's recent decision to increase the threshold for central bank deposits exempt from the negative rate. The decision to charge a negative rate to

customers by some banks only partly eases this pressure as so far it has been applied only to large deposits, but pressure on asset margins is less pronounced in Switzerland than in some European

countries as banks have maintained good pricing discipline.

We believe that earnings pressure will be partly offset by overall sound domestic asset quality and low LICs. We expect Switzerland's GDP to continue to grow, albeit at a slower pace, but global

trade tensions and lower growth at its main trading partners present risks to growth due to the economy's open nature.

Pockets of Risk in the Swiss Real Estate Market The Swiss residential investment real estate market has shown signs of overheating, with prices

starting to fall after years of strong growth well in excess of that of residential rents. According to the central bank, a growing share of new residential investment mortgage loans is extended in

regions with high vacancy rates. Fitch-rated Swiss banks have limited direct exposure to the potentially most problematic segments of the domestic real estate market, but could be exposed

to the effects of a sharp correction if it spills over into other sectors of the economy.

Swiss G-SIBs Benefit from Past Strategic Actions Refocus on wealth and asset management has resulted in increased resilience of the two large banks' business models, which are further supported by their stable domestic universal banking

operations. This should help the banks navigate the more difficult environment as the cycle is turning. We expect some continued earnings volatility from the banks' downs ized but still

significant capital markets and investment banking operations, which increasingly support the banks’ core wealth management businesses. We do not expect large net cost reductions in the

short term as cost savings from past restructurings are likely to be reinvested in growth.

A More Challenging Revenue Environment for Wealth Managers, Intense Competition We expect wealth management divisions of the two big Swiss banks a nd larger pure play Swiss private banks to continue to generate healthy returns despite increased revenue uncertainty.

Wealth management is likely to remain a growth area for many banks, resulting in intense competition for clients and talent.

Private banks have benefitted from growth in asset prices in recent years as their revenues are

linked to the volumes of assets under management and would therefore be sensitive to a market correction. We also expect clients' risk appetite to remain subdued in the short term amid

geopolitical uncertainty. This will affect revenues through weaker demand for loans and clients' preference for lower-risk asset allocations, with lower associated fees. We believe that

geographical diversification, critical mass in core markets and businesses, as well as developed auxiliary businesses will remain key to mitigate revenue headwinds.

Data for UBS Group AG (UBS), Credit Suisse Group AG (CS), Zuercher Kantonalbank (ZKB), Banque Pictet & Cie SA (Pictet, based on consolidated accounts of Pictet Group), Compagnie Lombard Odier SCmA (LO), EFG International AG (EFG) and Cornèr Banca SA (CB).

Ratings Outlook/Watch (As of December2019)


Stable86%

Positive14%

0.0

2.5

5.0

7.5

0

10

20

30

UBS CS ZKB Pictet LO EFG CB

(%)(%)

Op. ROAE 1H19 (LHS)Op. profit/RWAs 1H19ᵃ (RHS)Op. ROAE avg. 2014-2018 (LHS)Op. profit/RWAs avg. 2014-2018 (RHS)

a 9M19 for UBS and CS, FY2018 for ZKB and CBSource: Fitch Ratings, banks


0

5

10

15

0

10

20

30


(%)(%)

Total capital ratio (LHS)CET1 ratio (LHS)CET1 requirement (LHS)Leverage ratio (RHS)

a End-September 2019 for UBS and CS, end-2018 for CBSource: Fitch Ratings, banks

Capitalisation and Leverage(End-June 2019ᵃ)

0

1

2

3

4

5

6


(%)

Min. (2014-2018) Max. (2014-2018)

End-Sep 2019ᵃ

a For UBS and CS; end-June 2019 for EFG, end-2018 for other banksSource: Fitch Ratings, banks


0.00

0.25

0.50

0.75

30 40 50 60 70

CS UBS

a First year of the latest large-scale restructuringb 12 months to end-Sep 2019Source: Fitch Ratings, banks

(Wealth and asset mgmt./total op. income, %)

(Op. profit/Fitch-adjusted tangible assets, %)

LTMb

FY2012aFY2015a

LTMb

Greater Focus on Wealth Management

0%

20%

40%

60%

80%

100%


Other non-interest incomeNet fees and commissionsNet interest income

Revenue breakdown by source. 9M19 for CS and UBS, 6M19 for other banksSource: Fitch Ratings, banks

Limited Reliance on Net Interest Income



Western Europe


UK Banks Economic and Political Uncertainty Drives Negative Sector Outlook UK banks are facing major uncertainty going into 2020 given Brexit and the likely changes in

economic and fiscal policy choices after the December 2019 elections. The outcome of Brexit will be key to the banks’ operating environment as the future UK-EU relationship will affect the

economy. Policy rate response and bank profitability are also likely to be affected. Even if a deal to leave the EU is reached by end-January, a ‘cliff edge’ risk is possible until a final agreement is

reached between the UK and the EU.

Almost all the UK banks’ Long-Term IDRs are on Rating Watch Negative. The Watches reflect uncertainty over the nature and timing of the UK's exit from the EU and the significant risk of a no-

deal departure that could cause substantial disruption to UK economic prospects. Such an outcome would likely result in negative action on the banks’ Long-Term IDRs, most likely with a

Negative Outlook being assigned.

Competitive Pressures to Continue The restructuring of the UK’s largest banks was largely completed in 2019, with ring fenced banks having been established. Excess liquidity in the system caused strong competitive pressure on the

pricing of residential mortgage loans, driving down margins, and this is expected to continue into 2020. Funding costs have been rising, partly as a result of the MREL build-up, and may continue to

affect profitability. Most major UK domestic banks’ balance sheets are structured to benefit from rising rates. On the other hand, growth could pick up sharply in the event of a smooth Brexit,

particularly from the business sector, which may partly mitigate margin pressure.

Cost Control to Remain in Focus Costs were pressured in 2019 by the need for banks to set up EU27 subsidiaries to remedy the expected loss of passporting rights, as well as ring-fencing and transformation-related charges.

Banks set aside large additional PPI provisions to deal with a strong inflow of claims received in August. We expect the banks to continue to focus on cost control in 2020, and for operating

returns to be more closely aligned with their pre-tax profits.

LICs Likely to Rise There was an increase in single-name impairments in 2019 and we expect this to continue into 2020, with expected credit losses possibly also increasing as a result of a weakening operating

environment. However, unemployment remains low, and falls in policy rates could help support affordability. We therefore expect rising LICs to remain manageable for the banks.

Solid Capital and Liquidity Positions Capital is being returned to shareholders, and with lower growth expectations we expect this to

continue in 2020, absent large unexpected additional conduct redress charges. Transitional MREL have been met and more issuance is expected for 2020. Challenger banks are likely to continue to

be under pressure, which may be accompanied by possible further exits from certain business lines.



Stable5%

RWN95%

HSBC

RBSGBARC

San UK

LBG

VMUKCBS

bbb

bbb+

a-

a

a+

aa-

aa

0 10 20 30 40

CET1 Ratio

(Ratio at end-June 2019)

NBS


0

2

4

6

0

10

20

30

40

50

HS

BC

BA

RC

LB

G

RB

SG

NB

S

Sa

n U

K

VM

UK

CB

S

(%)(%)

Total capital ratio (LHS)ᵃCET1 ratio (LHS)ᵃCET1 SREP requirement (LHS)ᵃLeverage ratio (RHS)ᵃ


Capitalisation and Leverage(end-June 2019)

0

2

4

6

8

10

HS

BC

BA

RC

LB

G

RB

SG

NB

S

Sa

n U

K

VM

UK

CB

S

(%)

Min. (2014-2018) Max. (2014-2018) June 2019ᵃ



-5

0

5

10

15

20

HS

BC

BA

RC

LB

G

RB

SG

NB

S

Sa

n U

K

VM

UK

CB

S

(%) Max difference 2014-2018 Avg. difference 2014-2018 1H19ᵃ

PPI and other conduct costs are in operating expenses at HSBC and Barclays, but as non-operating expenses for other banksSource: Fitch Ratings, Banks

Difference Between Operating ROAE and ROEs Reducing as PPI Charges Near End

Data for HSBC Holdings plc (HSBC), Barclays plc (BARC), Lloyds Banking Group plc (LBG), The Royal Bank of Scotland Group plc (RBSG), Nationwide Building Society (NBS), Santander UK Group Holdings plc (San UK), Virgin Money UK plc (VMUK) and Coventry Building Society (CBS). ᵃFY19 for VMUK, 1H20 for NBS.



Western Europe


Outlooks and Related Research

2020 Outlooks

Global Economic Outlook (September 2019)

Large European Banks Quarterly Credit Tracker – 2Q19 (September 2019)

Major UK Banks – Peer Review (October 2019)

Peer Review: Major French Banks (October 2019)

Analysts Olivia Perney Guillot

Co-Head Western European Banks

+33 1 44 29 91 74

[email protected]

Christian Scarafia

Co-Head Western European Banks

+44 20 3530 1012

[email protected]

Francis Dallaire

Nordic Banks

+46 85510 9444

[email protected]

Francois-Xavier Deucher

French Banks

+33 1 44 29 92 72

[email protected]

Pau Labro Vila

Greek Banks

+34 93 323 3464

[email protected]

Claudia Nelson

UK Banks

+44 20 3530 1191

[email protected]

Rafael Quina

Portuguese Banks

+33 1 44 29 91 18

[email protected]

Patrick Rioual

German and Austrian Banks

+49 69 76 80 76 123

[email protected]

Cristina Torrella

Spanish Banks

+34 93 323 8405

[email protected]

Francesca Vasciminno

Italian and Irish Banks

+39 02 87 90 87 225

[email protected]

Konstantin Yakimovich

Benelux and Swiss Banks

+44 20 3530 1789

[email protected]



https://app.fitchconnect.com/search/research/article/RPT_10090774




mailto:[email protected]












Western Europe


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