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[Alfred E. Neuman]

S&P highlights banking risks

By Charles Batchelor in London

Oct 24 2004 22:20


Leading European banks have failed to learn the lessons of previous corporate failures and remain dangerously dependent on small numbers of important clients, according to a report published by Standard & Poor's, the credit rating agency.

Banks in Germany, Italy, Portugal and Sweden would be particularly vulnerable if some of their large customers got into difficulties, said the report due to be published on Monday, which does not name individual banks.

"Large, single-name concentrations . . . remain an important potential risk factor in European banking," it said. "The corporate credit losses of recent years have not reduced banks' tolerance for concentration risk to any large degree."

The rating agency also warned that European regulators will have a great deal of discretion under the Basel II accord - which seeks to relate asset backing more closely to risk - and that it is not clear how they will handle concentration of risk.

"The current regulatory regime regarding large exposure - 10 per cent of total regulatory capital - is not stringent enough," S&P said. "Given the insufficient emphasis historically placed on this issue, S&P considers that investors would only stand to benefit from increased public disclosure requirements."

This is the second time within days that S&P has voiced concerns about the standards applied under Basel II. Last week it warned banks they could face rating downgrades if they cut their asset backing to the minimum required by the accord.

A significant concentration on individual clients is a negative factor that can sometimes weigh materially on a bank's credit rating, S&P warns in its new study.

"Something that has a double A rating at its inception could become double B," said Per Törnkvist, an S&P banking analyst. "What you thought was not a problem could become a substantial issue."

Recently, ratings upgrades have exceeded downgrades but the 2001-2003 downturn saw many blue-chip companies such as Marconi, ABB and Alstom become "fallen angels," moving from investment grade status to junk.

The average size of the 20 largest single-name exposures at the top 100 European banks, S&P said, was equivalent to 8 per cent of common equity, excluding non-consolidated subsidiaries and goodwill. It was 40 per cent of net operating income before loan loss provisions. The averages disguise the fact some banks have virtually no measurable risk concentration while others show very high ratios, S&P said. The banks most likely to have big risk exposure are those catering for particular industry groups and oriented towards wholesale and corporate banking.

Some banks are still willing to maintain large exposures to valued clients. German banks, in particular the state-owned Landesbanks, have high concentration ratios because the banking market is so fragmented.

Banks in the UK, France and Spain occupy the middle ground of risk concentration while smaller markets such as Switzerland, Belgium and Denmark have low exposure, S&P said.