European Bank 2023 Outlook: Higher Rates Will Help in Navigating Weaker Economies

DBRS Morningstar has released a commentary discussing the outlook for European banks in 2023.

Key highlights include:

• DBRS Morningstar anticipates a generally stable outlook for the ratings of European banks in 2023, despite a number of challenges facing the banks.

• Geopolitical developments are set to continue in 2023 given the ongoing war in Ukraine and heightened U.S.-China tensions, and inflation remains high in spite of some signs of slowing down. Against this backdrop, DBRS Morningstar considers the levels of loan loss provisions will likely further increase.

• However, DBRS Morningstar expects significantly higher Net Interest Income (NII) at European banks in 2023 to offset the increase in credit risk from weaker economic prospects. We have already seen material increase in NII in jurisdictions where interest rates increased quickly in FY22.

• Some European jurisdictions are more exposed to changes in interest rates due to the predominance of variable rate pricing in the loan books, and DBRS Morningstar’s expectation is that the continued rapid increase in interest rates from mid-2022 across EU jurisdictions will add pressure to borrowers. Nevertheless, banks’ levels of Non-Performing Loans are still generally low.

“Overall, European banks are entering this current phase having demonstrated resiliency throughout the pandemic,” said Vitaline Yeterian, Senior Vice President, Global Financial Institutions at DBRS Morningstar. “NII is the main contributor to banks’ revenues, and we expect the higher interest rate environment to drive stronger NII, whilst at the same time the war in Ukraine, high inflation and weaker economies could further drive higher loan loss provisions. However, we expect most European banks are well positioned to maneuver this renewed challenging operating environment.”