by Henry MacNevin
SVP, Senior Analyst
EMEA Banking Group
EMEA's largest banks: Full results of the 2008 EMEA Bank atlas poll (subscriber only)
Banks in 89 countries are ranked by Shareholder equity ($m), Total assets ($m), Net income ($m), RoE, period end (%), RoA, period end (%), Loans as a percentage of deposits, Tier 1 capital ratio (%).
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Banking markets across the EMEA region have all been affected by the ongoing credit market crisis over the last year. The environment is likely to remain very challenging for some considerable time, and the outlook for the region’s banking systems is generally negative. The extent and nature of this however differs significantly across economies and markets, and even within markets. In these conditions it is particularly important to accurately assess the credit risk of given markets and individual banks within those markets, and correctly identify where the risks lie and to assess their severity.
The UK has been among those banking systems in the region that have been affected quite substantially due to the combination of significant structured credit exposures, deteriorating asset quality, and tight liquidity, relating both to market sensitive sources of funding and lack of market confidence. Measures taken by the UK government to subscribe capital and provide liquidity have provided meaningful support for the country’s banking system, however the outlook remains negative, justified by high levels of personal indebtedness and house price deflation, and these pressures are likely to persist for at least one to two years.
Spanish banks have also seen a deteriorating operating environment, with asset quality worsening very rapidly, particularly as a result of weakness in the real estate development sector, to which many banks are highly exposed. The household sector, which shows a high level of indebtedness, is also suffering in the weaker economic climate. This deterioration in asset quality, as well as difficulty in obtaining market funding on which they were highly reliant, has put considerable pressure on Spanish banks, leading to numerous negative rating actions, and here too it is likely to be some time before we see any structural improvement. It should be noted that not all Spanish banks have been equally affected; many small and regional banks have suffered more due to concentration of exposure in the property development sector, often outside of their local markets, while some of the larger banks have been less affected, with Santander in particular being able to take advantage of the situation to acquire Alliance and Leicester and Bradford and Bingley in the UK. However in Spain as in the UK conditions in the banking sector are likely to remain challenging for some time.
While the outlook for the French banking system may be less negative than for some others in Western Europe, all large banking groups have had to make significant write-downs on their structured credit portfolios, and have seen the profitability of their corporate and investment banking activities significantly affected, to a point where some are actively reviewing their business models. The outlook for asset quality in France as elsewhere is also negative, if not to the extent seen in the UK and Spain for example, and the French banking system will also have to weather a protracted period of economic weakness.
Pressure on German banks has mainly stemmed from some banks’ undue risk concentration, and weak management this concentration, to structured credit products, in their loan portfolios and to some specific situations, for example Lehman Brothers or Icelandic banks. The banking system as a whole however benefits from a still more benign economic environment. Consumers are less indebted and the property market had largely moved sideways since the burst of the real estate price bubble earlier this decade. Nevertheless, pressure for the banks should increase in 2009 in line with a weakening economy, however more in line with a moderate cyclical downturn rather than in line with a rapid adjustment of markets. Similarly the Italian banks have been less affected by the credit market crisis, with the banks having very little direct exposure to this, and the outlook for the banking system being driven mainly by the weak economic outlook, something which has however been a feature of the Italian market for some time, and is largely already reflected in the banks’ ratings.
The Nordic banking systems have been affected to differing extents by the credit market crisis and so while conditions remain challenging across the region the severity of this differs from country to country. The extreme case is clearly Iceland, where the Icelandic Financial Supervisory Authority has taken the control of the country's three largest banks. For the other four countries declining asset quality, and difficulty in accessing liquidity have affected the banks, and another potential risk for some banks is their exposure to the Baltic states. The assets and senior liabilities of Roskilde Bank, a Danish regional bank, were taken over by the Danish government in August, after which liquidity became even scarcer. To ease access to liquidity all the central banks in the region have implemented enhanced liquidity arrangements and support schemes, which will remain in place for the coming years, with full details still being worked on.
Across the Central and Eastern European (CEE) region the operating environment and outlook for many banking systems is also becoming more challenging. Banks are experiencing deteriorating asset quality and face lack of confidence leading to severely limited access to liquidity and funding, examples of this having been seen in Russia, Kazakhstan, Hungary and Ukraine for example. Governments in this region, as elsewhere in Europe, have been taking a variety of measures to support the liquidity and capital adequacy of banks. The outlook for banking systems in the region remains negative, and it remains to be seen to what extent the deteriorating economic outlook will affect individual countries or the region as a whole. Another consideration will be the extent to which some Western-European banking groups are exposed to conditions in the region either through their subsidiaries or via direct loan exposures.
Generally therefore the outlook for banks operating in the EMEA region is challenging and is likely to continue to remain so. The main challenges being faced, beyond the write-downs on structured credit products or US sub-prime mortgages, which affect a relatively limited number of banks, is the general deterioration in economic conditions. Those banking systems, and individual banks within banking systems, which are exposed to factors such as high levels of personal indebtedness, recent high house price inflation and high levels of property development lending combined with excessive reliance on more volatile sources of income are likely to be more severely impacted.
In this environment it is important to take into account the widespread and often co-ordinated response being taken by regulators and governments to support their banking systems, through for example enhanced deposit protection, subscription of capital or various forms of liquidity support. While these measures need to be considered on a case by case basis, they have generally provided a considerable degree of systemic support for banking systems as a whole, and significantly reduced the possibility of a collapse of banks and entire banking systems. This has generally proved supportive of Moody’s bank ratings, but has not lead to broad upgrades, as the ratings already had factored in support, and because such measures are likely to prove temporary in nature. With these systemic issues, which threatened the stability of banking systems having been addressed, the focus may now be able to return to the fundamental analysis of bank and banking systems. Also, while such support measures have been supportive of ratings on deposits and senior debt we have seen a willingness on the part of regulators and governments to allow holders of more junior obligations of banks, such as hybrid capital and subordinated debt, to suffer losses.
In analysing the risk profile of banks in the EMEA region in the current environment, it is therefore important to consider the general outlook for each banking system, the risk profile of individual banks, and also the nature of likely support in each country and its implications for different seniorities of banks’ obligations, and to avoid generalising the risks against the current negative backdrop.
Good bank analysis and assessment of the associated risks is therefore particularly complex in the current environment, and likely to remain so for some time.