"Although banks have already reported a significant percentage of their expected losses on subprime exposures, the deleveraging process currently underway in European banks is likely to act as a drag on profitability and asset quality," says Julia Peach, Managing Director and head of Fitch's European Financial Institutions. "A number of banks are already in the process of strengthening capital ratios." Fitch believes that banking systems in the UK, Ireland, Germany and Iceland may face the greatest headwinds over the next 12-18 months.
Also speaking at Fitch's Global Banking Conferences were analysts from the US and Asia. Fitch believes US financial institutions are facing an extremely challenging environment. The outlook for both US banks and securities firms remains Negative, as financial results at many banks will exhibit increasing stress from fundamental credit quality deterioration. However, with investors clearly willing to invest in banks with solid core franchises and bankers willing to take the appropriate steps to preserve and fortify their capital positions, most US banks are reasonably well positioned to manage this period of severe credit stress. Fitch believes that earnings prospects for US securities firms are more limited in the near-term. Capital raising efforts through Q108 stemmed further negative rating actions. Access to liquidity is a key ratings driver for these companies.
Major Japanese banks have not been as badly affected by the subprime crisis as some US and European banks. They have taken close to USD10bn of losses, with some additional losses from structured investments still expected. The larger Australian banks have continued to perform well throughout the credit crisis although some concerns remain. Wholesale funding costs have increased significantly for the larger Australian banks, while smaller Australian financial institutions have been impacted to a greater extent, with a number now funding mainly through retail deposits.
