Moody's: European banking outlook 2016; CEE banking systems will overall maintain stable credit profiles, but risks remain

A more favourable macroeconomic environment will support stable asset quality across Central and Eastern Europe in 2016, but pockets of risk remain, says Moody's Investors Service in a report published today.

Moody's report, entitled "Banks -- Europe: 2016 Outlook: Fundamentals Now Stable, But Asset Risk and Profitability Pressures Remain," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

"Funding structure and profitability have improved in some CEE banking systems," says Carola Schuler, a Managing Director at Moody's. "Furthermore, capitalisation will remain solid across the CEE region."

The macro operating environment is favourable for CEE banks' operations and credit demand will be mostly supported by growing domestic consumption and gradually recovering labour markets. The rating agency also expects a gradual increase in the currently underdeveloped market for lending to small and medium-sized enterprises (SME).

Challenges remain, however. Nonperforming loan (NPL) ratios remain high, for example, even though the quality of Slovenian and Romanian banks' loan books has improved in the past 1-2 years.

Banks' profitability will also be challenged in some CEE countries. "Low interest rates will continue to put pressure on banks' earnings in 2016," explains Ms. Schuler. "Institutions aim to soften the impact by growing their loan book but profitability for Slovenian, Hungarian and Romanian banks will remain modest." There are also downside risks in Poland from the prospect of a new bank levy and a forced conversion of Swiss franc mortgages on unfavourable terms for banks.

Czech and Slovak banks will maintain their strong credit profiles, supported by good asset quality and robust capitalisation, although high single-name and sector credit concentrations continue to be a source of risk for these systems.

While capitalisation will remain solid across the CEE region, Moody's does not expect a material increase in capital ratios as banks' loan books grow (which consumes capital) and they are expected to pay out a significant proportion of profits as dividends, supporting their foreign parents.

CEE banks will also continue to be predominantly deposit funded, particularly Czech and Slovak banks. Loan-to-deposit ratios have improved in Hungary, Slovenia and Romania owing to deleveraging in recent years but significant reliance on FX funding remains a prominent feature in Romania and, to a lesser extent, in Poland. Finally, recently introduced legislation on covered bonds in Poland and Romania should open the way for issuance of this type of instrument helping banks to reduce maturity mismatches.