Moody’s maintains negative outlook for German banking

The fundamental credit outlook for German banking remains negative, reflecting the fragile state of the global financial markets, the potentially prolonged economic downturn and the high vulnerability of many German banks, coupled with the unpredictability of their future performance, Moody's Investors Service said in its new Banking System Outlook on Germany. The outlook on the German banking system was changed to negative from stable in April 2008.
Moody's negative outlook for the German banking system is in place since April 2008.
The domestic economic environment in Germany has declined materially and is likely to deteriorate further over the next 12 to 18 months. The expected drop in GDP in 2009 of 5%-6% — one of the sharpest in the Eurozone — will put the country's corporate sector under increasing pressure as its manufacturing and engineering industries suffer from the sharp slowdown in foreign demand.
"German banks face substantial new pressures at a time when many are still burdened with illiquid, high-risk asset portfolios and are in need of capital. Moody's outlook for the system therefore remains negative," said Katharina Barten, a Moody's senior analyst.
Almost two years into the global financial crisis, German banks are significantly weakened. Many have suffered major write-downs on structured credit investments as low growth and poor earnings potential in the domestic market has led them to expand business in international markets and higher-risk asset classes.
"Several of the country's major players have turned out to be in need of support and some continue to face severe difficulties in weathering the crisis," explained Barten.
Moreover, not all the consequences of the tensions in the global financial system have been accounted for, and Moody's cautions that additional fair value adjustments will likely be required in the current financial year. Taking into account the low absolute capital levels, the banking system as a whole remains vulnerable to potential shocks and to the risk of further adverse developments.
Moody's views the low level of transparency as an important driver for the negative outlook; there is currently limited predictability as to when the sorely needed recovery of the banking system will happen and how strongly equipped banks will be when the bulk of expected credit losses materialise. In line with this high level of insecurity, the challenging operating conditions in the international financial markets and the poor outlook for profitability in 2009 and 2010, bank financial strength ratings (BFSRs) in Germany have been, and currently continue to be, under pressure.
By contrast, senior unsecured debt and deposit ratings have to date displayed considerably more resilience and are facing less pressure thanks to the Financial Market Stabilisation Fund (SoFFin), and Moody's expectation that support will continue to be available for the majority of the rated banking universe in Germany. Furthermore, regional government support for Landesbanken has also proved to be available, which underpins their senior debt and deposit ratings.
In the long run, Moody's expects banks to recover their earlier financial strength and pay more attention to risk-return considerations, the focus of their business models, the sustainability of earnings and capital levels.
Moody's support assumptions may also be subject to adjustment in the medium term, as the government's readiness to support banks may weaken after the crisis and may be available only on a more selective basis than today.