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Moody's Investors Service has changed the outlook on Germany's banking system to stable from negative, reflecting the removal of uncertainty surrounding government support following the introduction of a banking resolution framework in the country.
Our stable outlook replaces last year's negative view, which was driven by changing attitudes towards government support for ailing banks in Europe. The implementation of an effective bank resolution regime in Germany led us to reduce our assumptions for government support in June 2015, and these have been factored into German banks' ratings.
In addition, German banks are benefiting from increasingly stable operating conditions. As Moody's noted in September, we forecast GDP growth in Germany of 1.0-2.0% in 2015 and 1.5-2.5% in 2016 and unemployment to remain at a low level of between 4.0-5.0%.
"The credit profiles of German banks are characterised by high quality loans, adequate capital buffers and reduced reliance on confidence-sensitive capital market funding," says Andrea Wehmeier, a VP-Senior Analyst at Moody's. The main challenge over the outlook period will be to maintain steady profits in an environment of persistently low interest rates, margin erosion and high costs.
German banks' problem loan ratio, at 3.7% of gross loans as of year-end 2014, is at the lower end of the range in the EU. "We expect loan quality in the banking system to remain sound, although a recent fall in domestic market sentiment indicators might imply a slight increase in non-performing loans (NPLs)."
Moody's notes that German banks have also significantly reduced their exposure to typically volatile asset classes such as global shipping, commercial real-estate and structured credit exposures.
In addition, the ECB's prolonged accommodative monetary policy should help sustain low-cost market funding, while Germany's status as a safe haven affords banks access to domestic and international financing, says Moody's.
The German banks' ratings also factor in changes in insolvency legislation from 2017, which will lead to a higher priority for depositors in an insolvency versus senior unsecured debt. Such legislation is therefore credit positive for deposit ratings and credit negative for senior unsecured and issuer ratings.
