Fitch Ratings said at its annual Global Banking Conference in London that European governments are likely to renew bank funding and liquidity facilities where necessary until the global financial system returns to a normal operating environment. Fitch does not expect acute refinancing risk because governments will not want to repeat the current financial crisis.

"We anticipate that European government guaranteed funding will slowly reduce over the coming months as confidence gradually returns to the market," says Julia Peach, Managing Director and Head of Fitch's European Financial Institutions Group. "However, we caution that there is a likelihood of a two-tier return to the public non-guaranteed market, with stronger, systemically important 'lower risk' banks returning more quickly and at better pricing levels."

Fitch anticipates fewer ratings downgrades of European financial institutions in the second quarter of 2009 than in the preceding two quarters, as banks continue to benefit from a wide array of support measures from governments. The number of rating actions has already moderated slightly in Q109 from its peak in Q408, although the majority of actions were negative. As banks move into the second stage of the crisis, dealing with the effects of the credit crunch on the real economy will be crucial.

Until investors and banks regain full confidence in global banking systems, funding and liquidity pressures are expected to remain. Fitch expects a return to a more traditional banking model with banks selling non-core assets and foreign subsidiaries. Many banks are already well into such a process. This may have a significant downward impact on profitability and solvency in the short- to medium-term. However it will have a positive impact upon risk profiles.

In Fitch's view, investor confidence will return more quickly to those banks exhibiting higher pure equity and lower leverage rates. Banks' relative funding profiles are also key differentiators.

With regard to key Asia-Pacific markets, over the next year Fitch expects reduced levels of securities losses at Japanese banks. However, credit costs for these banks are likely to rise. This poses further risks to Japanese banks' capital and Fitch considers it important that they strengthen capital ratios, especially the common equity component if they are to achieve sound stand-alone ratings.

"At the start of the crisis, the Japanese economy appeared to be relatively insulated and the Japanese banks' strong liquidity gave them advantages over many international peers, but the spreading of the crisis has subsequently exposed the weaknesses of the banks, notably their large exposure to the stock market, and thin underlying profitability and capital levels," said David Marshall, Managing Director in Fitch's Asian Financial Institutions group.

Australian banks have navigated the global financial crisis relatively well but face a challenging environment as the Australian economy moves into recession. Credit growth is slowing, impacting bank revenue, while impairment charges have risen sharply as asset quality has deteriorated. Although Fitch expects further asset quality deterioration through 2009 and into 2010, the increase would be from a relatively low base and Australian banks' pre-provision profits should provide a buffer against higher impairment charges.