Moody’s Investors Service has changed its outlook on Germany’s banking system to stable from negative for the first time since the onset of the global financial crisis.
The rating agency’s outlook for Germany’s banking system has been negative since April 2008. Today, that outlook was changed to stable, as Moody’s believes that German banks are now more able to withstand shocks after a year of lower losses and capital strengthening.
Moody’s says the improved outlook also takes into account the prospect for a more stable operating environment due to an improving economy and benign credit environment; continued strengthening of the banks’ capital buffers due to tougher capital requirements; the ongoing reduction in risky assets and deleveraging; and, improved funding structures and liquidity buffers.
Moody’s expects that banks’ capital levels will further strengthen, even though asset quality will deteriorate mildly, over the next 12-18 months, “as banks work through their stock of impaired legacy investments while incurring a gradual rise in new problem loans.”
The rating agency also expects funding structures and liquidity levels to remain sound, partly because the banking system increasingly relies on deposits and less on market funding, implying improved stability for the system overall. Moody’s says it expects this trend to continue during 2013-2014.
Notwithstanding the brighter outlook, Moody’s is also forecasting a deterioration in the earnings, and in efficiency, of the German banking system in the year ahead, as low interest rates and over capacity continues to pressure profit margins.
It also notes that the environment for government support of the banks is gradually weakening, as the German, and other European, authorities take steps to strengthen the legal framework for regulatory intervention and ease the process for an orderly wind-up of troubled banks.