Money Buzz! Europa

Tag: moodys

  • The coronavirus pandemic will put pressure on the revenues of regional and local governments

    The coronavirus pandemic will put pressure on the revenues of regional and local governments

    Moody’s Public Sector Europe said in a report that the coronavirus pandemic will put pressure on the revenues of regional and local governments in the Czech Republic, Poland, Hungary, Russia and Turkey in 2020, leading to higher deficits and debt burdens.

    The economic contraction caused by the coronavirus shock will translate into falling shared taxes and own-source revenues for RLGs in these five countries.

    Their combined funding needs will exceed €25 billion in 2020, up from €21 billion in 2019, before returning to pre-crisis levels in 2021.

    Regional and local governments in Turkey and Poland are the most vulnerable to a prolonged crisis due to high debt exposure and modest operating performance, respectively.

    Regional and local governments’ debt burdens will increase in all five countries before stabilising in 2021 as revenues pick up, except Turkey.

    Turkey, Poland and Hungary will record the highest debt burden increase in 2020.

    “Regional and local governments in the Czech Republic, Poland, Hungary, Russia and Turkey will be hit hard by the coronavirus shock in 2020,” said Vladlen Kuznetsov, a Moody’s Vice President – Senior Analyst and co-author of the report. “However, they will be able to weather the shock, given their mix of good fiscal flexibility, low debt burdens, and low refinancing risks.”

  • Banks across CEE suffered a slump in profits over the first quarter of 2020

    Banks across CEE suffered a slump in profits over the first quarter of 2020

    Banks across Central and Eastern Europe (CEE) suffered a slump in profits over the first quarter of 2020 as the banks set aside provisions for the impact of the coronavirus crisis on loan quality, says latest Moody’s report.

    Hungary’s OTP Bank, reported a small quarterly loss. High provisioning charges and interest rates cuts will compress net interest income, in the coming quarters.

    Profitability pressure will be particularly acute for Czech and Polish banks due to aggressive rate cuts by their central banks. Efficiency will suffer as lower revenues meet banks’ rigid cost base

    Loan quality is stable so far

    The banks have not automatically classified loans benefiting from payment moratoriums as Stage 2 (riskier) loans under IFRS 9 accounting standards.

    Nevertheless, these riskier loans have increased at some banks. Moody’s expect further loan quality deterioration once the moratoriums expire.

    Hungarian banks will be hit hard by the government’s blanket payment moratoriums on all loans, meaning borrowers must opt out to be excluded. Hungary’s central bank MNB expects an opt-out ratio of around 30%

    Capital buffers show a mixed picture

    Czech banks’ risk-adjusted capital position improved in the first quarter, although capital to total assets declined. The remaining banks reported broadly stable capital ratios.

    CEE regulators have granted greater flexibility in capital management by reducing regulatory minimum capital requirements

    Funding and liquidity are stable

    Banks across all systems have ample access to liquidity through their central banks. Hungary, Poland and Romania have launched government bond purchasing schemes to support bond prices and reduced the regulatory reserve requirements, thereby increasing banks’ liquidity.

    In the Czech Republic the government has amended the law to allow for quantitative easing by the central bank, although no use has yet been made of the tool

  • Poland’s aggressive rate cuts are amplifying profitability pressure for banks

    Poland’s aggressive rate cuts are amplifying profitability pressure for banks

    Moody’s has recently published a report concluding that the Poland’s aggressive rate cuts are amplifying profitability pressure for banks.

    On 28 May, the National Bank of Poland lowered its reference rate by 40 basis points, bringing the rate down 140 basis points cumulatively with three rate cuts since 17 March to a historic low of 0.10%.

    Easing monetary policy is part of the authorities’ policy response to soften the negative effect of the coronavirus crisis. The interest rate cuts will significantly reduce Polish banks’ net interest margins and add to potential profitability pressures amid lower business volume and rising credit costs.

    By lowering interest rates, the central bank aims to support household income and domestic business finances, which have suffered from the coronavirus health crisis. The rate cuts will help loan repayment and debt affordability. However, because Polish banks are primarily deposit-funded, they have limited ability to fully pass on the lower interest rates to their customers to reduce their funding costs. Therefore, the sector’s relatively good net interest margins will, like euro area peers, be significantly pressured.

    The country’s leading banks announced the lower rates’ sizeable effect on their income statement

    Bank Polska Kasa Opieki S.A (PEKAO, A2 stable, baa11), the country’s second-largest bank, said that it expects the new lower rate to reduce its net profit by PLN650-PLN700 million, shaving off around 45 basis points from its net interest margin of 2.80% as of year-end 2019. The reduction equates to approximately 23% of its 2019 pre-tax profit.

    Powszechna Kasa Oszczednosci Bank Polski S.A. (PKO BP, A2/A3 stable, baa2), the largest bank, said that it expects 2020 net profit to decline by PLN750-PLN800 million, which accounts for around 8% of 2019 net interest income and 14% of pre-tax profit. According to our estimates, this would reduce the bank’s net interest margin to around 2.90% from 3.16% at year-end 2019.

    Poland’s third largest bank, Santander Bank Polska S.A. (A2/A3 stable, baa2) said that it expects the rate cuts to shave PLN635-PLN700 million off its net interest income, or approximately 10% of 2019 net interest income. According to our estimate, keeping all else constant, the decline in net interest income would reduce the bank’s pre-tax profit by about 20% and its net interest margin to around 2.90% from 3.23% as of year-end 2019.

    The rate cuts add to the pressure on the banks’ profitability. All three banks reported a significant 20%-50% reduction in profit for the first quarter of 2020 because of significantly higher credit costs tied to the coronavirus pandemic and resulting recession.

  • Moody’s changes outlook on five European banking systems to negative

    Moody’s changes outlook on five European banking systems to negative

    Moody’s has reviewed the outlooks on nine European banking systems in light of the coronavirus pandemic, and changed the outlook to negative on five of them.

    These are Norway, Finland, Hungary and Portugal, which changed to negative from stable, and Slovakia, which changed to negative from positive.

    The outlooks on four other banking systems – the Czech Republic, Poland, Austria and Ireland – remained stable.

    Today’s outlook changes reflect the likely consequences of the coronavirus outbreak in Europe. Moody’s projects a cumulative contraction of the economy over the first and second quarters of 2020. Although supportive fiscal and monetary policy measures will likely aid recoveries with above-trend growth in subsequent quarters and in 2021, the output loss in the second quarter is unlikely to be recovered. In this environment, banks’ problem loans will rise, and their increased loan loss provisions will reduce profitability. Most European banks’ profitability is already low relative to global peers.

    Still, in most of the banking systems, liquidity is strong and capital buffers are substantial, providing a solid base to absorb unexpected losses.

    The change in the outlook on the Norwegian, Finnish, Hungarian and Portuguese banking systems to negative from stable reflects Moody’s expectation that all four countries will experience a sharp contraction in economic growth. Banks’ profitability will weaken due to rising loan loss provisions and reduced lending growth.

    While Norwegian banks currently exhibit low volumes of non-performing loans and very high levels of capitalisation, and benefit from generous crisis support measures underpinned by the country’s sovereign wealth fund, the impact of the coronavirus on their asset risk will be exacerbated by the fall in oil prices.

    In Slovakia, where the outlook for the banking system has changed to negative from positive, the coronavirus-induced slowdown will reverse a previous improvement in asset quality. Slovakia’s high levels of household debt and significant dependence on exports could exacerbate the impact of the downturn.

    Moody’s has kept stable outlooks on the Czech, Polish, Austrian and Irish banking systems

    In the Czech Republic and Austria, the increase in problem loans will start from a low base, and stronger bank profitability than in many other European banking systems adds to resilience.

    The deterioration of loan quality in Poland will likely be moderate as lending growth has been relatively subdued.

    In Ireland, problems loans had been reducing rapidly due to restructurings and portfolio sales. However, Moody’s expect a delay in asset sales and an increase in new arrears. Even so, solvency is expected to remain strong.

  • UK growth and consumption weaken, housing market is worsening

    UK economic activity has remained lacklustre at best in recent months, alongside a weakening in the housing market, consumption and financial conditions, Moody’s Investors Service said in its latest Brexit Monitor.

    “The UK economy contracted in the second quarter of this year, the first decline since 2012,” said Colin Ellis, Moody’s Managing Director – Chief Credit Officer EMEA and co-author of the Brexit Monitor. “In our view, if no Brexit deal is reached between the UK and the European Union, the UK economy could suffer a significant and persistent loss in output.”

    UK manufacturing and construction PMIs have fallen to their lowest levels since 2013 and 2009 respectively. However, retail sales volumes and activity have both stabilized.

    Capital investment and investment intentions have contracted further in 2019, while exports and the trade balance have been volatile.

    The risk of a credit negative no-deal Brexit has increased in recent months. Further delay to the UK’s withdrawal from the EU prolongs uncertainty and does not resolve the final outcome. A no-deal Brexit would have credit negative implications for a number of debt issuers.

  • European banks are safer, but debt is riskier

    The financials of European banks have strengthened over the last five years and their credit profiles have improved, but the debt they issue has become riskier, Money Buzz! learned from the latest Moody’s Report.

    This apparent paradox is due to European Union (EU) regulation governing bank failures, which requires banks to issue more junior forms of debt to protect senior liabilities from losses.

    European banks have become less risky over the past five years. The standalone creditworthiness of large European banks has improved, with the average baseline credit assessment of the largest rated EU banks rising by half a notch over the last five years, now averaging Baa2.

    Over the same period, the risk profile of debt issued by European banks has weakened. The average credit rating of debt issued by the same group of European banks has dropped one notch to Baa1 from A3.

    This is due to new bank regulation

    The EU bank resolution regime (the Bank Recovery and Resolution Directive or BRRD) establishes a process by which failing banks can be wound down in an orderly way. This in turn requires banks to issue a special layer of debt that is designed to be bailed in at a time of stress. The size of this debt layer for EU banks is determined by the Minimum Requirement for own funds and Eligible Liabilities (MREL) or for the largest global banks, their Total Loss Absorbing Capacity (TLAC).

    By absorbing losses in a resolution it protects senior debt holders, institutional depositors, and ultimately taxpayers from losses.

    Banks are issuing less low-risk senior unsecured debt and more higher risk nonpreferred senior debt. Large banks need to meet their regulatory MREL and TLAC requirement for bail-in-able debt and for most, this requires the issuance of more junior debt, typically from holding companies or in non-preferred senior form. Moody’s views these debt types closer in risk terms to subordinated debt instruments and we consider that the likelihood of government support is low. As a consequence, these debt instruments almost always have a lower rating than senior debt.