Belgium banking outlook raised to ‘stable’

The outlook for Belgium's banking system has been changed to stable from negative, said Moody's Investors Service, explaining that the change reflects the likelihood that the operating environment will stabilise over the outlook period, supported by a slight recovery in the domestic economy.
The rating agency said that the change also reflects the decline of legacy issues and restructuring operations that have taken a toll on the banks since 2008, and takes into account the banks' improved liquidity, as witnessed by their lower reliance on short-term and central bank funding over the past year.
Moody's expects that over the 12-18 month outlook period, a modest return to growth in the Belgian economy in 2014 will help moderate the banks' asset-quality deterioration. However, the operating environment remains fragile. Both business and consumer confidence are low, despite a slight improvement in recent months, and unemployment is forecast to rise.
Losses on domestic loan portfolios will likely rise gradually from current low levels as a delayed result of earlier economic weakness, but the low indebtedness of Belgian companies and households should ensure that losses remain moderate. Although losses on some higher-risk non-domestic loan portfolios are stabilising, notably in Central and Eastern European countries, Belgian banks will still face pressures on their operations in Ireland and Hungary as their exposures to weak economies in the EU periphery still present some tail risks.
At the same time, Belgian banks have made good progress in managing legacy issues, such as large exposures to structured assets and in restructuring their operations. This has helped strengthen and stabilise the banking system.
Moody's says that the banks' liquidity has improved substantially over the past year, and they rely less on short-term borrowing and central bank funding. The narrowing of banks' spreads that followed a fall in Belgian sovereign bond yields provided them with better access to long-term wholesale funding. Combined with their strong customer deposit base, they are now more resilient to market shocks than several other European banking systems.