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Financial Mirror (Cyprus) - - FRONT PAGE -

Fi­nan­cial sta­bil­ity is im­prov­ing in most Euro­pean bank­ing sys­tems, but ris­ing bail-in risks and weak prof­its pose chal­lenges, ac­cord­ing to Moody’s In­vestors Ser­vice.

The rat­ing agency said that new EU-wide reg­u­la­tion has en­forced higher cap­i­tal lev­els, which, through de-risk­ing and bet­ter as­set-li­a­bil­ity match­ing will im­prove bank per­for­mance, longer term. How­ever, weak macroe­co­nomic con­di­tions weigh on Europe’s bank­ing sec­tor, and low over­all bot­tom lines im­plies that the Euro­pean bank­ing in­dus­try re­mains struc­turally vul­ner­a­ble.

“We may see banks mak­ing fur­ther ad­just­ments to their costs and pos­si­bly changes to their business mod­els. Euro­pean banks’ bot­tom lines should ben­e­fit from de­clin­ing pro­vi­sion­ing costs in 2015, but con­duct and lit­i­ga­tion charges will re­main high,” said Carola Schuler, a Man­ag­ing Di­rec­tor in Moody’s EMEA Fi­nan­cial In­sti­tu­tions Group.

Also, given the pend­ing EU bail-in regime, be­nign fund­ing costs are likely to rise. It re­mains to be seen whether banks will be able to pass on to their cus­tomers the higher cost of reg­u­la­tion and in par­tic­u­lar, any bail-in costs.

“What we will likely see in terms of as­set qual­ity is a split be­tween broadly sta­ble con­di­tions for banks in core euro area coun­tries, with no­table ex­cep­tions be­ing Ger­man banks’ ship fi­nanc­ings and Dutch banks that are im­pacted by the chal­lenged real es­tate and SME sec­tors, and a slow­ing of pres­sures in the pe­riph­ery,” con­tin­ued Schuler. “In the pe­riph­ery, new prob­lem loan for­ma­tion has slowed, but, the de­gree to which we will see a bot­tom­ing-out of this trend will de­pend on a more sus­tained im­prove­ment in still-dif­fi­cult eco­nomic con­di­tions,” ex­plained Schuler. Moody’s also said that ECB fund­ing de­pen­dence for banks in pe­riph­ery coun­tries has fallen sig­nif­i­cantly. Grad­ual im­prove­ment in in­vestor sen­ti­ment to­wards pe­riph­ery banks has widened mar­ket ac­cess also for medium-sized or smaller firms and the cost of fund­ing has de­creased; but, with the re­cov­ery still frag­ile, th­ese im­prove­ments could be sub­ject to sud­den change.

Moody’s noted that of the non-euro area EU coun­tries, the UK’s banks are ben­e­fit­ting from eco­nomic re­cov­ery and pru­den­tial reg­u­la­tory mea­sures and im­prov­ing bank fun­da­men­tals shield against re­main­ing hous­ing mar­ket risks. How­ever, cred­i­tors face head­winds from the fi­nal­i­sa­tion of the UK res­o­lu­tion and bail-in regime. Fur­ther­more, low in­ter­est rates and eco­nomic growth support the per­for­mance of the Nordic bank­ing sys­tems, whose banks rank among the high­est-rated in Europe. Although Moody’s says that banks in th­ese sec­tors are ex­posed to the risk of cor­rec­tions to cur­rently high house prices, par­tic­u­larly in Norway and Swe­den which may pres­sure bank per­for­mance.

Cen­tral and east­ern Euro­pean (CEE) economies and bank­ing sys­tems are on a re­cov­ery trend, de­spite the key down­side risk posed by CEE’s sig­nif­i­cant trade link­ages with the core EU coun­tries which are fac­ing weak macroe­co­nomic con­di­tions. CEE bank­ing sys­tems with a high share of for­eign cur­rency lend­ing (Hun­gary and Ro­ma­nia) are likely to be more ex­posed to FX vo­latil­ity in 2015, ex­ac­er­bated by re­duced fund­ing lev­els from par­ent banks since the fi­nan­cial cri­sis.

CIS banks face strong head­winds in 2015 owing to the Ukraine cri­sis and geopo­lit­i­cal risks, which will re­sult in CIS banks’ as­set qual­ity and cap­i­tal re­main­ing un­der pres­sure in 2015. For ex­am­ple, in Ukraine, mas­sive loan re­struc­tur­ings un­der­state the level of prob­lem loans, and Moody’s ex­pects to­tal prob­lem loans to rise to 55% of gross loans into 2015 (YE 2013: 35%).

Fur­ther­more, in Rus­sia, banks’ prob­lem loan ra­tio will likely de­te­ri­o­rate to 9.5% (YE 2013: 7%).

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