In a recently published report, Fitch Ratings has highlighted that Europe’s largest banks are well-positioned to navigate the current muted economic outlook and potential risk areas, thanks to their robust performance in the first half of 2023.

The ability to sustain strong revenues amidst a more competitive economic landscape will be a crucial factor in absorbing increased operating and funding costs, along with a rise in loan-impairment charges (LICs) expected in the second half of 2023 and throughout 2024.

Most of the 20 major banks assessed in Fitch’s latest quarterly credit tracker have reported operating profit/risk-weighted asset ratios for the first half of 2023 that significantly exceed their averages from 2019 to 2022. 

This positive performance is attributed to the favourable repricing of assets in response to higher interest rates, outpacing the increase in funding costs. However, exceptions include French banks, which experienced more rapid growth in deposit costs due to regulated savings practices, and UBS, which faced challenges related to the integration of Credit Suisse.

While these banks are expected to continue benefiting from elevated interest rates in the second half of 2023 and throughout 2024, it is unlikely that net interest margins will see significant further expansion. This is due to factors such as rising pass-through rates, a gradual decline in customer deposits across the sector, peaking policy rates, slower loan growth, and less optimistic macroeconomic projections.

Fitch notes that the banks have managed to maintain relatively stable asset quality metrics, as the effects of monetary tightening on the real economy take time to materialize. Their median ratio of impaired loans stood at 2.4% at the close of June 2023, with higher ratios of 3% to 4% observed for banks located in southern Europe or those exposed to emerging markets.

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While some decline in asset quality is anticipated for the second half of 2023 and 2024, particularly in SME lending, consumer finance, and commercial real estate portfolios, Fitch expects only a modest increase in unemployment. This expectation should help support asset quality, and it is anticipated that the banks’ average LIC will remain relatively low compared to historical averages.