Major European banks face weaker profits after strong 2021
Europe’s major banks are facing weaker profitability in 2022 as the war in Ukraine weighs on economic prospects in the region, Fitch Ratings says in a new report.
We expect loan impairment charges (LICs) to increase from low levels as asset quality deteriorates, but most of the 20 large banks covered in our latest quarterly credit tracker are well-placed to absorb the impact, helped by their sound performance in 2021.
Pressure on economic growth due to the war could weaken the banks’ business and financial prospects, while revenue from corporate and investment banking is likely to decline as tailwinds from buoyant capital markets in 2021 fade. However, retail banking should be more resilient and net interest margins could improve, particularly where monetary policy is tightening.
The banks reported stronger profits in 4Q21 than before the pandemic, helped by very low LICs. Asset quality remained sound and capitalisation remained a rating strength for most of the banks. Shareholder distributions increased but the uncertainty due to the war may lead some banks to moderate additional distributions.
A first round of losses on direct exposures to Russian counterparties will appear in the banks’ 1Q22 results, with losses likely to be 30%-50% of the exposure amounts, depending on guarantees and collateral values. However, in most cases direct exposures are small and the impact should be cushioned by large pre-impairment profits.
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Societe Generale and UniCredit have the largest Russian exposures, reflecting their subsidiaries in the country. However, Russian exposures only represent about 2% of each group’s total exposure.
Even a full write-off of the two banks’ investments in their Russian subsidiaries would have a moderate impact on capital at a group level and would be unlikely to lead to a rating change.
