In a recently released report, Fitch Ratings outlines that Europe’s largest banks are poised to enter 2024 on a solid foundation, demonstrating resilience in the face of a subdued economic outlook.

The report reflects on the continued robust performance throughout 2023, propelled by higher interest rates contributing to increased net interest margins (NIM). However, the analysis suggests potential challenges, including higher funding costs and a modest impact on asset quality, leading to a slight dip in profitability.

Throughout the third quarter of 2023, most of the 20 large banks featured in Fitch’s quarterly credit tracker exhibited notable strength. The growth in net interest income and minimal loan impairment charges (LICs) resulted in impressive operating profits. The median annualised operating profit/risk-weighted assets ratio saw a significant rise to 3.2%, compared to 2.1% in 2022.

While French banks faced challenges due to liabilities repricing faster than assets, Fitch anticipates their performance aligning with other banks in 2024 as loan books gradually reprice. UBS and Deutsche Bank, however, underperformed due to integration and restructuring costs, respectively.

Despite reduced lending volumes in the third quarter of 2023, the banks showcased better-than-expected asset quality performance. The median annualised LIC stood at 25 basis points of gross loans, a historically low figure. The banks, with substantial capital buffers and resilient funding and liquidity profiles, appear well-prepared to weather potential challenges.

However, the report notes a potential uptick in funding costs in the first half of 2024, driven by increased competition on deposit remuneration, prompting some banks to enhance their term deposit offerings.

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Fitch Ratings expects only moderate asset quality deterioration in 2024, contingent on unemployment rates. While impaired loans may rise with increasing insolvencies and weakened household repayment capacity, the banks possess management overlays to mitigate potential impacts.

As the banking sector navigates the evolving economic landscape, the report provides insights into the outlook for the coming year, emphasising the adaptability and resilience of major European banks.

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