Report Highlights Continued Downside Risk for European Banks' Loan Books
A report by Standard & Poor’s foresees a protracted, but moderate, deterioration in the quality of European banks’ domestic corporate loan books, the performance of which will continue to be challenged by still-tough economic conditions across most of the region. ‘Despite the lower provisioning charges recorded by the European banking system in the first half of 2003, we feel it is still too early to signal a turnaround in Europe’s credit cycle and remain cautious over the near term,’ said credit analyst Elena Iparraguirre. Domestic bad debts and loan loss provisions are likely to rise further in 2003 and 2004, even if the Eurozone economy starts to recover. ‘This scenario of a moderate deterioration in the quality of domestic corporate loan books is already largely factored into our existing ratings on European banks and is counterbalanced by the banks’ generally sound earnings and capital strength,’ said Arnaud de Toytot, a managing director in Standard & Poor’s European Financial Institutions Ratings Group. The corporate sector faces the current challenging economic climate from a position of relative weakness, given the excessive leverage accumulated during the late 1990s, according to Standard & Poor’s. Such leverage not only limits the sector’s flexibility to deal with tough market conditions, but could also constrain investment spending, thereby further restricting economic growth prospects.