Business World

Monday 11 December 2017

Moody's cuts credit ratings of six German bank groups

Luciana Lopez

MOODY'S cut the credit ratings of six German banking groups and Austria's three largest lenders yesterday, underscoring that even the eurozone's strongest economies face risks as Europe's debt crisis deepens.

The downgrades to Commerzbank, Germany's second-largest lender, and several smaller German banks, are part of a broad review of financial institutions in the eurozone that has had investors on edge. More downgrades could follow later this month.

Moody's said German lenders faced risks to the quality of their assets if the eurozone crisis worsened or the global economy slowed more, while also noting the relative strength of the German and Austrian economies.

Shocks

"We wanted to identify vulnerabilities from further potential shocks from the euro area debt crisis and how this would affect investor confidence in institutions across Europe," said Moody's analyst Carola Schuler.

The ratings agency was particularly concerned about a potential slip in the value of banks' portfolios of international commercial property, global ship financing, eurozone periphery sovereign bond and private sector assets, as well as a backlog of structured credit products, she said.

"German banks have limited capacity to absorb losses out of earnings and that raises the potential that capital could diminish in a stress scenario," Ms Schuler added.

Commerzbank saw its long-term rating cut by one notch to A3 from A2 and assigned a negative outlook, with Moody's noting it had sizeable exposures to borrowers in Europe's periphery. Commerzbank declined comment, as did other lenders.

Moody's action was widely expected, bankers said, noting that share prices showed little reaction yesterday.

"The fact that the debt crisis is intensifying again is affecting all banks," said Georg Fahrenschon, president of Germany's savings bank association DSGV.

The downgrades leave the banks around the middle of Moody's rating spectrum, with Scandinavian banks generally rated higher.

The agency delayed action on Germany's biggest lender, Deutsche Bank and its subsidiaries, saying that it would come with reviews for other global firms with large capital markets operations that are expected to be completed by the end of June.

For the Austrian banks, Moody's noted vulnerabilities from operating conditions in Central and Eastern Europe and the Commonwealth of Independent States. Austria's central bank has been urging lenders to shore up their balance sheets, which it says are undercapitalised compared with international peers, but it has also taken issue with critics of banks' exposure to emerging Europe.

Ratings agencies see Austria's relatively large financial sector as a potential risk to sovereign ratings should the state need to step in again to prop up lenders.

Austria had to nationalise two banks during the 2008-09 financial crisis and has just got a large minority stake in ailing Volksbanken.

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