Credit ratings agency Moody’s has downgraded its outlook for European banks to negative, predicting that weak economic growth will cause loan quality and profitability to suffer over the coming year.
The agency has already downgraded its outlook for the UK, German and global banking systems, again citing weak growth and a highly uncertain 2020.
“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.
The US-based agency said a key issue for European banks is the ultra-low interest rates put in place by the European Central Bank and the Bank of England, which limit the so-called net interest margin on which lenders can make money.
A number of northern European banks such as UBS and Deutsche have criticised the ECB’s policy of negative interest rates, saying it hurts revenue. The ECB argues the policy is necessary to tackle stubbornly low inflation, however.
The Moody’s report came down on the side of the banks, saying: “Lower for longer interest rates and structural inefficiencies will erode already weak profitability, making the necessary investments in technology and business model adjustments challenging.”
It also said that weak economic growth – the ECB has predicted that Eurozone GDP will grow by just 1.2 per cent in 2020 – will make it more difficult for borrowers to pay back loans. “We expect loan-loss charges to rise slightly,” Moody’s said.
In the UK, the credit agency said that “ongoing Brexit-related uncertainty” is set to weaken loan demand and operating conditions.
Read more: Moody’s downgrades outlook for global banks
Moody’s said there would have to be a “recovery of broad-based economic growth” for the outlook to return to stable from negative.
It added that a “reversal of interest rates and improved profitability, in particular by successfully addressing cost inefficiencies” would boost Europe’s banks.