(Finance) – Most of the big European banks are well positioned to address the economic slowdown in 2023 and its impact on asset quality. This is stated by Fitch Ratings in a new report on the subject, where it is emphasized that only a “slight” deterioration in their NPL ratios is likely, as a significant portion of their loans are made up of residential mortgage loans which have proven to be resilient in many countries, while underwriting standards have been tightened since previous crises.
The rating agency also expects support packages – both country-specific and EU-wide – to cushion the impact of the recession for the private sector. “However, they exist pockets of risk within SMEsespecially those with weakened financials due to the pandemic or in sectors most vulnerable to higher energy costs and interest rates,” the study reads.
Commercial real estate will also suffer as the economic slowdown weakens demand and increases vacancies. Rent growth, even if aided by inflation-linked indexation, is expected to be challenged by higher-charged tenants and more cautious retail tenants.
Fitch expects higher loan-performing charges to moderately weigh on bank profits in Q4 2022 and 2023 due to provisions defined”prudent and farsightedMost retail banking operations in Europe will continue to benefit from higher interest rates next year, although high inflation will add cost pressures and reduce the benefits from raising rates.
“High macro and geopolitical uncertainty could be favorable for trading activities in 2023but will continue to put pressure on asset management and investment banking businesses for at least the next two quarters,” the report said.
According to Fitch, bank capitalization will remain healthy in 2023, even if the chances of improvement in ratings will decrease due to the weaker economic environment and capital levels, which will decline towards the entities’ medium-term capital objectives.