Fragile stability for Europe's banks, says S&P
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The European banking sector has achieved a fragile stability and has made a weak return to profitability, according to Standard & Poor’s.
A report published by the ratings agency today says this is thanks to government policies from across Europe designed to prop up the financial industry.
But the report also warns that the cushion of government support has a limited shelf life, and says that the withdrawal of various government support measures will be a major them of European banking in the near future.
The report says: “In the meantime, the impact of the deep recession rolls through the loan books of European banks and, in our view, seems likely to continue to do so for several periods.
Scott Bugie, credit analyst at Standard & Poor’s, says: “The cost of building reserves to cover those future expected losses is likely in our view to be a drag on bank earnings over the medium term.”
On average the European banking sector posted a positive result for the first half of 2009, following an overall loss for 2008.
But Standard & Poor’s says that overall returns remain weak and points out that one in five of the largest European banks posted a net loss in the first half of this year.
Bugie says: “The weaker-than-historical-average earnings prospects and high credit loss charges we expect in 2010 and 2011 are the main reasons for our negative credit outlook for the majority of European banks.”
The report says that proposed regulation forcing banks to make ‘living wills’, or Standard & Poor’s describes them “pre-made recovery and resolution plans” will help determine bank’s creditworthiness in future.
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