European Bank Intrinsic Strength Recovery Continued in 3Q

European Bank Intrinsic Strength Recovery Continued in 3Q

European Bank Intrinsic Strength Recovery Continued in 3Q

The FINANCIAL -- Developed market European banks had the largest number of Viability Rating (VR) upgrades out of Fitch Ratings' global bank rating universe in 3Q14. The improvements in standalone credit profiles were mostly the result of improved capitalisation and reduced risk profiles.

Banks in developed market Europe accounted for 46% of VR upgrades globally in 3Q14. There were 11 VR upgrades in 3Q14, nine in 2Q14 and eight in 1Q14, so the improvement appears to be gaining traction. These positive trends are flowing through to bank Issuer Default Ratings (IDRs), with developed Europe accounting for 38% of global IDR upgrades in 3Q14, according to Fitch Ratings.

The banks in the region have strengthened their balance sheets in recent years and many continue to raise equity, increase loan loss reserves and restructure businesses. The improving macroeconomic environment also helped.

The region's VR upgrades far outweighed the five VR downgrades. But the downgrades, which resulted from asset quality deterioration, weak performance or less certain prospects, highlight weaknesses in parts of Europe. High levels of unreserved problem loans leave some banks, particularly in weaker eurozone countries, still vulnerable. The risk of deflation in the eurozone is also increasing, although this is not our base case for the bloc as a whole, according to Fitch Ratings.

The dominance of developed market European banks among 3Q14 global rating actions is unsurprising given these dynamics. Looking ahead, this sector is also likely to feature heavily in rating changes. Fitch has Negative Outlooks on 41% of developed market European banks' IDRs, which includes our assessment of potential support. This reflects our view that sovereign support is likely to diminish rather than any expectation of weakening standalone creditworthiness. We expect to remove uplift for state support from most of our developed market European bank IDRs by end-June 2015.

Emerging market European banks also saw a fair share of ratings actions, although the trends were mixed. Developed and emerging market European banks together represented 56% of global IDR upgrades, 73% of downgrades and roughly 60% of VR rating actions.

Outside Europe, bank rating trends point to stable expectations for developed market banks. Outlook stability remains high in developed market Americas and Asia/Australasia, with very limited upgrade potential. Global emerging market bank rating stability improved in 3Q14 in all regions except Middle East/Africa, after a declining trend over the last year, according to Fitch Ratings.