Credit rating downgrades are likely to rise this year for Western European banks, says Fitch Ratings.
The rating agency said that there will likely be an increase in rating downgrades for European banks in 2020, amid a deterioration in the banks’ operating environments due to a sharp drop in global GDP.
Fitch reported that over 95% of the Western European banks have negative rating outlooks or have been placed on “rating watch negative,” highlighting the increased risk of downgrade.
Ratings that have been placed on rating watch face “more immediate pressure” on their ratings, Fitch said, whereas negative rating outlooks generally have a one- to two-year time horizon, reflecting its expectations of more gradual changes.
Banks that are on rating watch may be placed there because they “entered the crisis from a position of weakness,” it said, or due to larger exposure to more vulnerable business sectors or asset classes.
Companies on rating watch will have their ratings resolved on a case-by-case basis in the near term, “once there is more clarity on the potential impact of the crisis on these banks,” it said.
“Measures to ensure that banks continue to act as a conduit for providing liquidity to the real economy are supportive of banks’ viability, but their effectiveness will depend on how quickly they are implemented, on how long the crisis lasts and on what form the recovery will take,” it said.
Fitch noted that it intends to continue rating banks “through the cycle,” but that “the nature and severity of the current crisis is unprecedented and clearly beyond any traditional or even stressed business cycle.”