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S&P: Earnings Growth Projected for Majority of European Banks

Publication Date: Jun 21, 2004 10:00 AM EDT



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LONDON June 21, 2004--Major European banks maintained, on average, sound earnings in the first quarter of 2004, following on from the solid financial performance delivered in 2003, Standard & Poor's Ratings Services noted in a report released today.
"Although conditions could be less buoyant in the capital markets in the remainder of 2004, as the easing of short-term interest rates drags to an end and the rebound in stock markets could be short lived, we expect earnings growth to be supported by the gradual economic recovery in continental Europe," said Standard & Poor's credit analyst Arnaud de Toytot. Ratings have largely been stable over the past three months, in contrast to the negative trends seen until early 2003. "The growing proportion of positive outlooks on our ratings indicates that more balanced rating activity should continue in the coming quarters," he added.

Favorable capital markets in the first quarter of 2004 translated into a strong rebound in profitability for the leading debt houses, including Deutsche Bank AG and Credit Suisse, as the banks took advantage of a combination of lower rates, copious debt issuance, and tighter credit spreads. Standard & Poor's does not factor into its ratings a continuation of such exceptional conditions for fixed income.

Provisioning charges have continued to decline from their peak and were relatively benign in the first quarter of 2004. Such improvement largely reflects the positive trend in wholesale credit markets and international risks. The weight of domestic credit losses continues to vary significantly across Europe, reflecting differences in the economic cycle, with still relatively higher credit problems in Germany, Italy, and Portugal. However, downside risks appear to have abated.

Sound earnings and low asset growth have translated into solid capital generation for most European banks. The $10.5 billion acquisition of Charter One will, however, initially pressure core capitalization at Royal Bank of Scotland (RBS), reflecting the goodwill and financing mix of the transaction. Standard & Poor's expects RBS to rebuild core capitalization over the next 12 months through strong retained earnings.

There have been no rating changes among the top-50 Western European banks over the past three months. Recent outlook revisions have confirmed the more positive trend that appeared in 2003. On March 17, the outlook on Banco Comercial Portugues was revised to stable from negative. As of June 15, there were 10 negative outlooks in the top-50, compared with five positive ones. Outside of the five Landesbanks (the ratings on which range between 'AAA' and 'AA-'), the negative outlooks on which reflect the prospective phasing out of government guarantees in July 2005, negative outlooks no longer outweigh positive ones, in sharp contrast with the situation over the past two years. 70% of the ratings carry a stable outlook.

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