Coronavirus causes negative outlook for European banks in 2020

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The coronavirus disease outbreak together with a significant oil price drop is creating a loss of investor confidence and significant disruptions in the financial markets, DBRS Morningstar said in a comment on Monday.

The rating agency added that “the situation is rapidly evolving and while the full impact on European banks remains uncertain, it will clearly be negative.”

Key highlights from DBRS Morningstar’ commentary discussing the coronavirus:

  • In this environment, we expect European banks’ profitability to weaken from 2019 levels with pressure on net interest margins likely to intensify and new lending volumes to be lower than initially anticipated while net fee and commission income is also expected to be affected.
  • The extent of the impact on delinquencies is uncertain, but impairment charges are likely to increase, reflecting lower economic forecasts in impairment models and weakening asset quality.
  • Meanwhile, measures introduced by governments and central banks will provide some relief, albeit also creating challenges (eg lower interest rates, requiring forbearance on certain borrowers).
  • From a balance sheet perspective, banks are better positioned than at the start of the 2008 crisis, with stronger capital and liquidity and funding profiles. However, if markets remain challenging for an extended period of time, we expect some banks to need to access ECB funding to meet 2020 refinancing needs and to postpone some debt issuances.
  • We also see potential operational risk but technology and regulators should support business continuity.

“With the coronavirus disease outbreak, the situation is rapidly evolving. The full impact on European banks remains uncertain, however, we think it will clearly be negative,” said Vitaline Yeterian from DBRS’ EU Financial Institutions team.

“There will be pressure on revenues, and there will be pressure on asset quality. At the same time, as the situation evolves, we could see more measures announced by central banks and governments to mitigate the economic impact.”