Europe’s major banks are generally well-placed to face market volatility resulting from rapidly rising interest rates and shaky investor confidence, Fitch Ratings says in a new report.

Most of the 20 large banks in Fitch’s latest quarterly credit tracker have sound fundamentals following strong results in 2022. This will help them to absorb pressure from monetary tightening, which is pushing up funding costs, and should mitigate potential deposit volatility.

The banks’ median loans/deposits ratio was 94% at end-2022, close to the five-year historical low. Funding franchises are strong, with high proportions of granular customer deposits covered by deposit insurance schemes. Strong wholesale debt issuance in early 2023 reduces the need to access markets in the near term, according to Fitch.

The banks have maintained strong liquidity, including large proportions in cash, and have access to central bank funding lines in their normal course of business. However, rapid funding outflows at Credit Suisse, which ultimately led to its acquisition by UBS, highlight how banks can be vulnerable to a loss of market confidence.

Europe’s major banks

Liquidity positions will remain under the spotlight until markets regain confidence. Liquidity coverage ratios ranged from 129% to 194% at end-2022 and we estimate that high-quality liquid assets accounted for at least 15% of the banks’ total assets throughout 2022, well in excess of their wholesale short-term funding. Under European regulation, liquidity indicators use the market values of securities.

The banks’ median operating profit/risk-weighted assets ratio was 2.1% in 2022. We expect profitability to remain sound in 2023 despite rising pass-through rates on deposits, slower loan growth and modestly higher loan impairment charges. Impaired loan ratios are at their lowest in a decade (end-2022: 2.2%, on average). Capital ratios are generally at or above target levels.

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Listed banks include Credit Mutuel Alliance Federale; Lloyds Banking Group plc; ING Groep N.V; Credit Suisse Group AG; La Banque Postale S.A; Credit Agricole; Standard Chartered PLC; Intesa Sanpaolo S.p.A; CaixaBank, S.A.
HSBC Holdings plc; Groupe BPCE

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