- We have taken diverse rating actions on six large European banks following a review of their likely balance sheet resilience in the face of the pandemic, as well as their medium-term profitability outlook.
- The positive actions recognize anticipated balance sheet resilience, aided by the banks' previous or ongoing efforts to reshape their operations.
- For the others, we see challenges as management teams move to shore up their long-term health in the context of persistent low economic growth, ultra-low interest rates, and rapid structural change through digitization.
- We see these banks as a microcosm of the challenges faced by the European banking sector, notably the importance of focusing their businesses on areas of sustainable competitive advantage, and reinforcing efficiency through digitization.
- The expected slow emergence of nonperforming assets means that where we have doubts about bank asset quality and capitalization, the related negative outlooks could persist for some time.
Too early to consider a wider industry review. As we said in early February, we expect that 2021 will be a year of reckoning for many of the 40% of European banks that started the year on negative outlooks (see Capital Resilience Alone Won’t Stabilize European Bank Ratings In 2021, Feb. 3, 2021).
The continued negative bias recognizes that much of the industry faces significant challenge, despite unprecedented government fiscal support that will, in general, likely prevent this sharp cyclical economic downturn becoming an acute capital event (see chart 1). Economic downside risks persist and, even under our base case, the effects on bank asset quality are unlikely to become clear until much later in 2021. In addition, bank management teams across the region face a common challenge to adjust to the persistent weak revenue environment and imperative of digital transformation, albeit to varying degrees.
With this in mind, we still consider it too early to undertake a broader review of our negatively biased ratings across European banking systems. We will continue to take rating actions on individual banks or across national banking sectors where possible.
Idiosyncratic developments prompted a focused review. We reviewed our ratings on the six banks as we saw idiosyncratic reasons to re-evaluate them following fourth-quarter 2020 results or in light of recent strategic announcements. For each bank, our rating triggers were more sensitive to idiosyncratic developments than any future revision in the relevant banking industry country risk assessment. In the same vein, the diverse rating actions reflect their idiosyncratic credit stories. They also acknowledge the different rating levels, with issuer credit ratings (ICRs) ranging from 'AA-' to 'BBB' and stand-alone credit profiles (SACPs) from 'a+' to 'bbb' (see table 1).
|Summary Of Rating Actions On Feb. 26, 2021|
|Entity*||Long-term ICR/Outlook||Group SACP|
|Affirmation, Outlook Revision|
Nordea Bank Abp
ABN AMRO Bank NV
Barclays Bank PLC
Deutsche Bank AG§
|Affirmation, Outlook Unchanged|
Banco de Sabadell
|*Lead operating company and, where relevant, holding company. Ratings on other group entities may also be affected. ¶Group SACP has been revised downward by one notch, leading us to downgrade the bank's hybrid instruments. §We also upgraded our issue ratings on the bank's additional tier 1 capital instruments.|
We comment more fully on each bank below, but a unifying theme is a history of business transformation or restructuring, although to varying degrees. The scale of the task has varied enormously--some banks have already completed the heavy lifting while others still have much to do.
Nordea is on track to regain its competitive edge. We always anticipated that Nordea would remain resilient, as its high ratings reflect, but we now consider it likely that management's business transformation and cost containment, underway since 2019, will achieve solid financial performance. Nordea's key financial targets for 2022 (return on equity above 10% and cost-to-income ratio of 50%) are some of the highest in Europe, certainly once potential earnings volatility is considered.
In 2020, Nordea was one of the few European banks that, despite not having a significant investment banking business, managed to grow pre-provision income--and not only from pronounced cost reductions, but also thanks to sound business volume growth. Indeed, we project the bank's operating income to rise by 3%-4% to €8.8 billion-€9.1 billion in the coming two years--not a huge amount but at a time when many peers will struggle to return revenues to 2019 levels.
We also anticipate that it will maintain high balance sheet strength despite the adverse environment. While the bank could return significant capital to shareholders by end-2022, this is largely because end-2020 capitalization was unusually high after it was prevented from paying out 2019 and 2020 profits. Its capitalization will likely remain a relative strength, in our view, and we expect that management will remain cautious until the full impact of the pandemic on the bank's asset quality becomes apparent.
Nordea now joins the vast majority of other Nordic banks that have a stable outlook, following the outlook revision on Finnish banks last month (see Outlooks On Seven Finnish Banks Revised Due To Their Resilience In The COVID-19-Induced Downturn, Jan. 22, 2021).
Barclays' diversity and solid 2020 provisioning suggest resilience. Barclays completed its restructuring in 2017, and we recognize that it has since achieved greater stability.
Our rating action on Barclays rather stemmed from our view that its prudent provision coverage and solid capitalization will mitigate residual risks over the remainder of the credit cycle. Despite a large impairment charge (see chart 3), it performed relatively resiliently in 2020, supported by favorable market conditions for its investment bank. We think this diversity leaves it less vulnerable to the weaker-than-expected U.K. environment and asset quality than for more U.K.-centric peers.
A lower impairment charge will likely support a recovery in earnings in 2021 even if investment banking revenues fall back. Beyond that, we expect earnings will strengthen toward Barclays' 10% return on tangible equity target, but achieving this threshold will likely require a more supportive yield curve.
Deutsche Bank might finally return to relative stability. Our outlook revision on Deutsche Bank acknowledges the bank's likely resilience to the current adverse economic conditions, leaving rating triggers focused on the restructuring story.
In 2013, we downgraded Barclays, Credit Suisse, and Deutsche Bank having revised down our view of their business position as they faced a challenge to reshape their investment banking operations--something UBS had already been forced to recognize. Barclays management completed its restructuring in 2017, and Credit Suisse in 2018, though it continues to refine its model even now. Deutsche Bank management started later than these peers, and it faced the most difficult restructuring task of all three banks, in an environment that became progressively harder to navigate. This is one reason why the SACP ('bbb') and ICR ('BBB+') are among the lowest of the globally systemically important banks and other large European names.
In earlier phases of this work, management made some in-roads on aspects such as improving the control environment, but it is only with the deep restructuring pursued since 2019 that Deutsche Bank now seems able to return to relative stability.
It could take another year to clarify whether the bank will ultimately achieve, or at least get close to, its 2022 financial targets, notably the targeted 8% RoTE. While falling restructuring costs and the realization of efficiencies will bridge most of the remaining gap, we see the greatest challenge from the revenue side. We expect that an 8% RoTE in 2022 would position Deutsche Bank around the median of the larger European banks (see chart 4).
Even if we were to eventually raise the ICR, this would reflect the full protection of its bail-in buffer for senior preferred creditors. We are unlikely to revise the SACP, and so our ratings on senior nonpreferred and capital instruments.
ABN AMRO's restructuring effort could squeeze profitability for the foreseeable future. Our decision to revise down our assessment of ABN AMRO's business position (and so its SACP) mirrors similar actions we took on HSBC and Société Générale in 2020--two other leading European banks that face a multi-year restructuring.
Management embarked on a restructuring phase in the second half of 2020, seeking to reduce the bank's risk profile after several credit and market events. The restructuring effort is not as deep as that faced by Deutsche Bank (historically) or Commerzbank (prospectively), but we nevertheless expect the bank's profitability to remain under pressure over the foreseeable future. With net interest income forming about 70% of the bank's operating revenues, we expect its business model and revenue structure to remain sensitive to the prolonged low interest rate environment and lending growth dynamics in The Netherlands and neighboring countries. We believe that the bank's strategic refocus on these markets, while making sense from a risk-adjusted return perspective, exposes ABN to a risk of revenue attrition.
We affirmed the ICR as the bank continues to build its buffer of subordinated bail-in capacity that reinforces protection for senior preferred creditors. We now expect the bank's additional loss-absorbing capacity (ALAC) to stay above 8% of our S&P Global Ratings risk-weighted assets (RWAs) by end-2022, as the wind-down of some non-core assets within its Corporate and Institutional Banking division reduces RWAs and the bank increases senior nonpreferred issuance (see chart 5). The accumulation of bail-in buffers is currently the only broad positive trend across European banks that could drive an upgrade or affirmation of their ICRs. ABN AMRO joins a growing number of high-profile European peers, notably in the U.K., Germany, The Netherlands, Switzerland, and the Nordics, in having built large subordinated bail-in buffers.
The heavy lifting now starts at Commerzbank. Like Deutsche Bank, Commerzbank is now far into a multi-phase restructuring that has already lasted for many years and took several attempts. In a deteriorating revenue environment, these measures have so far proved insufficient. Management is only now embarking on more radical steps to refocus and restructure operations. If successful, they would, by 2024, yield a material improvement in efficiency and a targeted RoTE of close to 7.0%.
However, we see significant residual difficulties throughout the process. Management's principal focus is to address a structural cost base that is unsuitable for the bank's earnings potential (see chart 6). However, this requires unwavering execution that focuses on reducing structural run-the-bank costs while accelerating the digitization of services and processes across the bank's value chain. Amid the tough operating environment, management's revenue targets are also more ambitious than they first seem--Commerzbank will need to offset revenue losses as it exits unprofitable client relationships.
Sabadell seeks to underpin its competitive position through greater efficiency. Although Banco de Sabadell's capitalization is far from a strength, we see some resilience to adverse developments beyond our base case, particularly if a weaker credit environment were to materialize (see chart 7).
We see the bank's main challenge as the transformation of its business model to make it more profitable. The demanding environment--in particular the low interest rates, intense competition in an increasingly consolidated industry, and customers' accelerated digitalization post-COVID--will not make this an easy task for the bank's new management. While credit-positive, the potential sale of TSB Bank, Sabadell's U.K. subsidiary, may also prove difficult to execute. We look to the launch of the new strategy in May for clarification around how management will bolster existing measures to ensure that the bank has a sustainable future as an independent player.
- Outlooks Reviewed On Six Leading European Banks; One Revised To Positive, Three Revised To Stable, Two Remain Negative, Feb. 26, 2021
- Capital Resilience Alone Won’t Stabilize European Bank Ratings In 2021, Feb. 3, 2021
- Low-For-Even-Longer Interest Rates Maintain Margin Pressure On European Banks, Feb. 2, 2021
- Outlooks On Seven Finnish Banks Revised Due To Their Resilience In The COVID-19-Induced Downturn, Jan. 22, 2021
This report does not constitute a rating action.
|Primary Credit Analyst:||Giles Edwards, London + 44 20 7176 7014;|
|Secondary Contacts:||Richard Barnes, London + 44 20 7176 7227;|
|Letizia Conversano, Dublin + 353 (0)1 568 0615;|
|Miriam Fernandez, CFA, Madrid + 34917887232;|
|Benjamin Heinrich, CFA, FRM, Frankfurt + 49 693 399 9167;|
|Salla von Steinaecker, Frankfurt + 49 693 399 9164;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.