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Moody's downgrades European banking sector outlook, exempts italian banks


Moody's downgrades European banking sector

Moody's, a well-known credit rating agency, recently made a significant announcement regarding the banking sector in several European countries. This announcement involved a downgrade in their outlook, which is a reflection of their analysis and expectations about future conditions in the banking industry.


The downgrade is primarily due to weakening economic conditions across these nations, which are seen as detrimental to the profitability and stability of banks. This move by Moody's is an important indicator of the financial health and future prospects of the banking sector in these countries.


The specific change made by Moody's involved altering their outlook from "stable" to "negative" for the banking sectors of six European countries: Germany, Britain, France, Belgium, the Netherlands, and Sweden. This revision indicates a growing concern about the financial resilience and future performance of banks in these nations.



The shift to a negative outlook is significant as it suggests that Moody's expects more challenging conditions for banks in these countries going forward, which could impact their credit ratings in the future.


The primary reasons behind Moody's negative outlook are twofold: firstly, there's an anticipated increase in losses due to unpaid loans, and secondly, a rise in the cost of funding for banks. The increase in non-performing loans suggests that borrowers are struggling to repay their debts, which directly affects the banks' profitability.


Meanwhile, higher funding costs mean that it becomes more expensive for banks to obtain the capital they need to operate, further squeezing their profit margins. Both factors are critical in assessing the financial health of banks and contribute to a more challenging operational environment.



Moody's has highlighted the broader economic scenario contributing to this negative outlook. The key issues are low economic growth and high borrowing costs, which are expected to have a negative impact on both credit growth and loan performance.


Particularly in the corporate sector of the largest European countries, these economic challenges are likely to result in a reduction in the amount of credit extended by banks and a deterioration in the quality of assets due to increased loan defaults. This scenario creates a more difficult landscape for banks, with reduced opportunities for growth and increased risk of financial distress.


Effie Tsotsani, an analyst at Moody's, underscored the implications of the deteriorating operating environment for the banking sector. Tsotsani's analysis points to the combined effects of sluggish economic growth and high borrowing costs, which create a hostile environment for banks. These conditions are particularly problematic because they can lead to a decrease in the demand for loans and an increase in loan defaults, both of which negatively affect a bank's profitability and stability.



In a contrasting development, Moody's upgraded its outlook for Italian banks, shifting it from "negative" to "stable." This adjustment indicates that the agency perceives an improvement or at least stabilization in the conditions affecting the Italian banking sector.


This is a notable divergence from the trend in other European countries and suggests that Italian banks may be better positioned to cope with the current economic challenges, or that the economic and regulatory environment in Italy is perceived as being more conducive to stable banking operations.


07.03.2024



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