Wednesday,September 04, 2019 /08:55AM / By Fitch Ratings / HeaderImage Credit: International Finace
The European banking sector's revenue outlook hasweakened since the start of 2019, with accommodative monetary policy likely tocontinue squeezing banks' margins, Fitch Ratings says in a new quarterlyreport. Banks' revenue could face extra pressure as a result of the uncertainoperating environment, notably from risks linked to Brexit, eurozone politicsand the US-China trade war. However, most banks still have significant scope toimprove cost-efficiency to support earnings, and we do not expect significantasset-quality deterioration in the short-term.
Revenue weakness was a theme in the sector's 1H19results, as we had expected, and several banks lowered their earnings targets,citing the challenging and increasingly uncertain operating environment. Recentannouncements by central banks indicate that interest rates are likely toremain low across the region in the medium term, weighing on net interestmargins. Competitive pressure and lack of pricing discipline are exacerbatingthis in some countries. The outlook for sales and trading income is also weakbecause of macro-economic uncertainty and subdued capital markets activities inthe context of a secular decline in the global fee pool.
The depressed revenue outlook is likely to increasebanks' focus on improving cost efficiency to support their profitability. Manybanks have yet to address long-standing structural cost-inefficiencies thatwere masked by top-line revenue growth in recent years. The median cost/incomeratio for the 20 large European banks analysed in our report was 66% in 1H19,which is high enough to suggest that there is significant scope forimprovement. We expect banks to accelerate cost-cutting through branch closuresand staff reductions, and the sale or closure of non-core businesses. Inaddition, we expect increasing emphasis on digitalisation to improve costefficiency.
We expect the sector's asset quality to remain stablein 2H19 as low interest rates continue to support borrowers' ability to servicedebt. Europe's economic slowdown has not yet resulted in a material increase innewly impaired loans. Loan impairment charges remain moderate overall, despitehaving risen from cyclical lows, and banks in countries with highernon-performing loans are still reducing their stocks of problem assets, thoughat a slowing pace. However, the weakened economic outlook increases thelikelihood of at least a modest deterioration in asset quality in the mediumterm, particularly given the high levels of private sector debt.
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