European banks put on negative outlook by Fitch ratings

Ten Western European banking groups have been downgraded by Fitch Ratings amid the coronavirus outbreak, and the agency has given 95{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of the lenders in its regional portfolio a “negative” outlook in its latest review.

The downgraded banks include the Cooperative Bank, Close Brothers and Metro Bank in the U.K., Commerzbank in Germany, Sweden’s Swedbank, Gruppo Bancario Iccrea in Italy and Credit Europe Bank in the Netherlands and banking groups in Cyprus, Spain and Luxembourg.

Fitch said in its latest review of its rated Western European banks on Monday that the downgrades mainly relate to companies for which the changed economic outlook affects action that was planned to improve profitability or capitalization.

They also include banks already vulnerable, for example because of weak profitability, or a weaker competitive position. 

In total, Fitch took 116 rating actions on the region’s banking groups in its April review, with the bulk of the rating actions revising their outlooks to “negative” or giving banks a “watch negative” rating.

The revisions come amid the coronavirus pandemic that has shutdown the majority of Europe’s economy as the region struggles to contain the virus that has now infected hundreds of thousands of people. 

Under Fitch’s current Global Economic Outlook base case, global gross domestic product will drop by 1.9{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in 2020, with euro zone GDP declining by 4.2{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}, before recovering in 2021.

“We really see this as something that’s beyond a normal business cycle and this triggered our review of the Western European banks,” Christian Scarafia, senior director at Fitch Ratings, told CNBC Tuesday.

“And the fact that we now have over 95{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of our Western European bank ratings on negative outlooks indicates that we see downside risks and we expect an elevated number of downgrades going forward and this really speaks to risks, to asset quality primarily, to earnings and ultimately, to capitalization.”

The limited number of downgrades, 10 in all, shows that most Western European banks went into the crisis with some headroom in their ratings, Fitch noted. Those that were downgraded are “weaker banks, or banks that have to take action which will be much more difficult now,” Scarafia told CNBC’s “Squawk Box Europe.”

The downgrades, he said, relate to “banks that depended on either growth, or depended on taking action to improve earnings, to improve asset quality, will find it much more difficult to do so in the current crisis, that has really been where we’ve seen the bulk of these downgrades.”

Fitch Ratings reviewed its portfolio of rated Western European banks between 20 March and 7 April in response to the sharp downward revision of global growth forecasts.

Fitch’s baseline sees the health crisis contained by the second half of 2020, leading to a recovery as lockdowns are removed and policy stimulus takes effect. But even assuming this level of recovery, euro zone GDP will not reach 2019 levels by end-2021, “which underlines the severity of the shock,” Fitch said.