Business Banking Outlook 2024 - Europe in Focus
(1 December 2023 - Europe) Higher interest rates are firmly making their mark on the European economy in the form of subdued investment activity coupled with elevated funding costs, adversely impacting growth and employment.
Utilising East & Partners’ ongoing global primary voice of the customer intelligence and analytics, the 2023/24 Outlook offers a clear and evidence-based indication of what lies ahead. Helping equip banking and finance leaders with a greater understanding of what lies behind today’s complex markets, enabling them to develop more robust strategies focused on the ultimate goal of sustainable growth.
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DBRS Morningstar has provided detailed analysis on the outlook for European business banking markets in 2024 with key highlights including
- Highly leveraged companies, most often owned by private equity sponsors, are a key segment where DBRS Morningstar observes rising vulnerabilities, as these companies' debt service capacity is reducing in the context of higher interest rates
- Most at risk are those companies that have weaker business profiles that limit their cash generation capacity
- When banks’ profits started to rise at the same time that households were still grappling with high inflation and higher rates, Spain was the first country to implement a windfall tax
- In Greece, where mortgage loans are mostly at variable rates, a cap on rates was implemented starting in May 2023 for a duration of 12 months to prevent further rises in mortgage rates. Portugal is also in the process of implementing measures to protect households
- The measures implemented so far still allow for banks to report healthy profits, as can be seen in the case of Spain
- In the UK there have been calls from the Bank of England (BoE) for banks to pass on more of the rate increases to depositors
- Vulnerabilities in asset quality are emerging. Nonperforming loans and associated credit costs are set to moderately rise in 2024 with the corporate sector to be more affected than the household sector
“Banks have benefitted from strong earnings in recent quarters, but we expect asset quality to deteriorate gradually due to the higher interest rates and continued weakness in most European economies, with the impact becoming more visible in the banks’ corporate loan portfolios“ said DBRS Morningstar Vice President, Global Financial Institutions, Sonja Förster.