The Asian Banker

Moody's changes outlook on Germany's banking system to stable from negative
Sep 12, 2013

Frankfurt, September 6th 2013 - The outlook for Germany's banking system, which has been negative since April 2008, has today been changed to stable, says Moody's Investors Service in a report published today. The outlook change reflects that, following a year of reduced crisis-related losses and improved capital strength, German banks are now more able to withstand shocks.

The new report: "Banking System Outlook: Germany", is now available on Moody's subscribers can access this report via the link provided at the end of this press release.

The change to a stable outlook recognises that following a year of reduced crisis-related losses and improved capital strength, German banks are now more able to withstand an adverse market environment. The improved outlook takes into account (1) prospects of a stable operating environment due to an improving economy and benign credit environment; (2) continued strengthening of the banks' capital buffers due, in part, to more stringent capital requirements; (3) the stabilising effect of an
ongoing reduction in high-risk assets and deleveraging; and (4) improved refinancing structures and ample liquidity buffers, which imply low funding risk.

Moody's expects that economic conditions in Germany will be mildly positive and therefore supportive for German banks. As noted in August, the rating agency expects German economic growth to gradually pick up over the next 12-18 months. Moody's central scenario for real GDP growth for full-year 2013 is 0.4%, with the expectation of a return to somewhat higher growth within a range of 1.0%-2.0% for 2014.

Moody's stable outlook for German banks' asset quality and capital is based on the rating agency's expectation that capital levels will further strengthen, even though asset quality will deteriorate mildly over the next 12-18 months as banks work through their stock of impaired legacy investments while incurring a gradual rise in new problem loans.

Moody's expects German banks to continue to boost their capital positions over the12-18 month outlook period through (1) continued asset reduction, as portfolios earmarked for unwinding are still sizeable; (2) divestment of assets with high regulatory risk weights (such as structured products); and (3) earnings retention, although profits will likely remain at a low level or even deteriorate in 2013-14.

The rating agency expects funding structures and liquidity levels to remain sound, partly because the German banking system increasingly relies on deposits and less on market funding. The result has been a better balance of loans and deposits, implying improved stability for the system. Moody's expects this trend to continue during 2013-14, even if some banks reduce low profit-yielding liquidity buffers to counteract pressure on earnings.

At the same time, Moody's forecasts a deterioration both in earnings and in efficiency for the German banking system during the 2013-14 outlook period, as low interest rates and overcapacities continue to pressure profit margins.

In addition, the environment for systemic, or government support is gradually weakening, as the German and other EU authorities take steps to strengthen the legal framework for regulatory intervention and ease the process for an orderly wind-up of troubled banks. The implementation of this framework will constrain systemic support in German and EU bank ratings in the future.

The stable outlook on the German banking system is consistent with the stable outlook on the standalone credit strength, as indicated by the bank financial strength ratings (BFSRs) assigned to most of the 40 rated German banks.


Re-disseminated by The Asian Banker

Categories: Results & Ratings
Keywords: Moody's

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