December 16, 2016 / 2:19 PM / 7 months ago

Fitch: End of Deleveraging to Support EMEA Bank Issuance in 2017

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: EMEA Financials Bond Market Monitor here LONDON, December 16 (Fitch) Fitch Ratings says in a new report that continued bank lending growth in the year to date suggests balance sheet deleveraging has peaked, providing support to bond issuance in 2017, although political event risk continues to be a possible source of periodic supply disruption. Political event risk in 2017 presents fresh hurdles for a European banking sector that is already navigating a challenging environment for earnings and - in some regions - asset quality. While EU banks have improved capital buffers markedly since the financial crisis, and bank lending is growing again, squeezed earnings due to weak growth, low rates and bad loans in some regions creates pressure points in parts of the sector, notably in Italy. Fitch forecasts eurozone interest rates to remain low into 2017, so net interest margin and earnings are likely to remain weak. Capital pressure on banks from the Basel transition and prospective changes to risk-weights could be mitigated by EU focus on ensuring implementation supports funding to the real economy. The majority of Rating Outlooks on Fitch-rated EMEA financial entities are Stable; however, entities with Negative Outlooks exceed Positive Outlooks by 1.8x, as at end-September 2016 - driven by banks in emerging-markets - implying further downgrade pressure in 2017. The negative bias has persisted since the financial crisis, but the gap to positive territory has narrowed significantly over recent quarters, indicating lower overall downgrade risk in 2017 compared with 2011-2014. Issuance declined 16% yoy in 9M16, reflecting the impact of years of balance sheet deleveraging and diminished need to tap capital markets, due to access to low-cost loans in the form of the ECB's Targeted Longer-Term Refinancing Operations. The upgrade-to-downgrade ratio for all outstanding financial institution bonds deteriorated to 0.5x in 9M16, from 1.2x in 2015, with over half of downgrades emanating from German entities, while UK and Turkish financials accounted for 14% and 12%, respectively. Upgrades were led by Nordic banks, accounting for 57% of bond volume. Divergent performance of bank bonds to stocks was a notable theme in 1H16 as senior debt showed resilience during risk-off periods while stocks sustained dramatic falls. Credit investors in part viewed improved capitalisation as offsetting the weaker economic growth outlook, while equity investors focused on the negative earnings impact of prolonged, low interest rates. The divergence peaked in the aftermath of the Brexit vote, but the gap has narrowed considerably ever since, due to a more than 45% rally in bank stocks from the 6 July nadir. The full report, EMEA Financials Bond Market Monitor, is available on www.fitchratings.com or by clicking the link above. Contact: Michael Larsson Director +44 20 3530 1260 Fitch Ratings Limited 30 North Colonnade London E14 5GN James Longsdon Managing Director Financial Institutions +44 20 3530 1076 Alan Adkins Group Credit Officer Financial Institutions +44 203 530 1702. Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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