Fitch Cautiously Optimistic on European Credit Outlook

Fitch Ratings, currently midway through its annual series of European credit outlook events, has issued some of the highlights from its presentation in London.

The credit ratings agency (CRA), which held presentations in Paris on 11 December and London on 12 December, focused on the question:
‘Why is Funding the Key to Recovery?’
The credit outlook event series will continue in Madrid on 22 January and Frankfurt 23 January.

Excerpts from the London presentations include the following:

Sovereigns:

“On the back of a fragile economic recovery and more settled financial market conditions in the eurozone, the sovereign credit outlook is slowly stabilizing,” said James McCormack, Fitch’s global head of sovereign ratings.

“The focus is shifting away from immediate concerns such as systemic tail risks and external solvency toward longer term issues including public debt levels and reform agendas to stimulate growth.

“A number of eurozone sovereigns remain on negative outlook, however, underscoring the challenges ahead.

“In emerging markets [EMs], the growth outlook is clouded by lower commodity prices and certain country-specific structural impediments. Moreover, the Fed tapering will put pressure on external funding conditions, although we don’t expect any ratings to be under threat from the tapering alone. Many EM sovereigns have spent a decade or more improving public and external balances.”

Banks:

“In addition to a still tough economic environment which is keeping sector profitability and credit demand in many European countries low, banks are wading through many regulatory challenges,” said Bridget Gandy, co-head of Europe, the Middle East and Africa (EMEA) banks at Fitch.

“Loan growth is unlikely to resume in earnest until the regulations are finalised. The European Central Bank’s [ECB] comprehensive assessment exercise means continuing to build capital is likely to be the key area of attention for many euro area banks in 2014.

“Beyond this, the earnings challenge from a low interest rate environment is likely to keep the sector outlook stable even when some positive economic momentum starts to come through.”

Corporates:

“Corporate default risk is still low generally and what downgrades we are likely to see next year will predominantly be very modest, both in scale and breadth – driven by company specific issues rather than sector trends,” said Richard Hunter, head of EMEA and Asia-Pacific (APAC) corporates at Fitch.

“The overall pattern, however, of a drip feed of downgrades outpacing the even more occasional upgrade, will remain until we see a return to stronger growth in Europe.

“We believe company boards are likely to remain very cautious about preserving their financial strength through 2014 and expect this to be reflected in a continued conservative approach to what levels of merger and acquisition (M&A) activity there are.”

Insurance:

“Despite expected downward pressure on European insurers’ earnings in 2014 as a result of the continuing low interest rate environment, we expect the industry to remain resilient with strong balance sheets, and good technical profitability,” said Chris Waterman, Fitch’s EMEA head of insurance.

Structured Finance:

“Policy makers across Europe are debating how to stimulate their economies and small to medium-sized enterprise [SME] lending is a big focus,” said Marjan van der Weijden, Fitch’s head of EMEA structured finance. “They are looking to securitisation techniques to fund the SME sector. From a credit risk perspective SME securitisations have performed well throughout the credit crisis and loss expectations on Fitch’s SME collateralised loan obligation [CLO] ratings portfolio are less than 1%,”

“However, potential investors in this asset class are looking for a higher return then the underlying assets are yielding making the transactions uneconomical. State related guarantees or participations could be a solution to narrow that gap.”

Global Infrastructure:

“The outlook for European infrastructure remains mostly stable, although there are still significant pockets of negative outlooks in some sectors,” said Dan Robertson, Fitch’s EMEA head of global infrastructure. “However, in many of these cases the situations have eased slightly since last year.

“The main factors supporting the stable outlooks are many infrastructure assets are supported by long term contracts or proven regulatory regimes; oil prices remain high supporting oil and gas producers and; transportation traffic in northern Europe has achieved modest but consistent growth in recent years.”

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