While European bank ratings remain stable, the asset quality is expected to deteriorate in upcoming quarters. Despite this, most banks are well-positioned to absorb higher credit costs.
The report forecasts that European speculative-grade defaults will continue to rise gradually, reaching 3.75 per cent by June 2024, up from 3.4 per cent in August 2023.
Official rates in the Eurozone are close to their peak and expected to remain high until late 2025 when inflation might return to its 2 per cent target. This will put further pressure on economic growth and accentuate the focus on cash flows, debt service, and sustainability, as per the report.
Four key risks remain largely unchanged from the previous quarter. These include the European economy on the verge of a shallow recession, tight financing conditions leading to rising default rates, tail risks associated with Russia's invasion of Ukraine, and higher refinancing costs affecting real estate credit quality. Additional concerns include potential impacts from a sharper-than-expected economic slowdown in China and increased trade tensions.
The trend in credit quality is turning negative, particularly for speculative-grade issuers, as financial conditions tighten. Real estate remains highly exposed, whereas structured finance ratings appear to be robust under modest stress conditions.
ALCHEMPro News Desk (DP)
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