Fitch says southern European banks in for another hard year

Ben Southwood
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THIS year will be another one of struggle for southern European banks, Fitch said yesterday, as it put the sector on a negative outlook.

Banks in Spain, Portugal, Italy, Greece and Cyprus will be kept in a tight grip by continued macroeconomic weakness and sovereign debt crisis. Lenders’ ratings are closely correlated with their governments’ rating.

“Weak macro conditions will continue to put pressure on earnings generation and asset quality,” said Erich van Lumich at Fitch. “The outlook is unlikely to change back to stable in the absence of an improvement in financial market conditions, which would allow for a more sustainable funding and liquidity profile across the sector with reduced reliance on the European Central Bank.”

A more positive movement may come from mergers and acquisitions, Fitch predicted, which could clear up overcapacity and improve efficiency, especially if there is continued lender flight to higher quality institutions.

But this will not erase the basic problems banks will have trying to boost their bottom lines, Fitch said, and it will be difficult to fill the gaps with patchier fee and commission income.