S&P Global Ratings considers that the persistence of modest economic growth and negative interest rates will likely weigh further on the profitability of many financial institutions operating in Europe, the Middle East, and Africa (EMEA).

The success of monetary policy in boosting growth and inflation will be limited in the absence of fiscal stimulus, placing the onus on governments to adopt more expansionary fiscal policies to counter austerity and help address inequality. Quantitative easing over a sustained period leads investors to search for yield in lower-quality, less liquid, and longer-dated assets. Political relationships and geopolitical event risks remain critical in both developed and developing EMEA economies in 2020, particularly risks relating to trade tensions and Brexit.

The eurozone economy should continue to expand moderately in 2020. Weaker external demand remains the main downside risk to European economic growth. Uncertainty regarding the parameters of the U.K.'s future trade relationship with the EU, its largest trading partner, continues to weigh on investment spending in the U.K.

Weak economic growth and a low-for-longer interest rate environment mean that banks' already low profitability is likely to worsen, though capital and asset quality are holding up. Some banks' business models could be brought into question in the absence of strategic measures to tackle costs and restructure in response to declining revenues and rapidly changing customer demands and competition in the new digital world.

On the macroeconomic side, future challenges include the fallout for employment dynamics and economic growth from waning political backing for structural reforms in Europe, and the effect on trade, supply chains, and market confidence should the U.K. leave the EU customs union and single market on Dec. 31, 2020, without a trade agreement.

A volatile geopolitical environment and uncertainty over domestic policy are also features of EMEA's emerging market countries. Many banking sectors in these countries face some deterioration in asset quality, or a high volume of previously accumulated problem assets. Vulnerability to abrupt movements in capital flows remain among the key risks for many banks in emerging market countries.

European Banks: What To Look For Over The Next Quarter

We see the following as key topics that might influence the performance of the European banking sectors in EMEA over the next quarter:

• Developments in the negotiations for a free trade agreement between the U.K. and the EU.
• Initiatives by domestic banking authorities to prevent the buildup of imbalances and greater risk-taking by banks.
• The shaping of the multiannual financial framework and its impact on the EU's long-term budget, climate action, and spending.
• The reaction of the least profitable banks to the low-for-longer interest rate environment, as well as progress in the recovery of systems that were hard hit in the previous downturn.
• Progress on banks' digitalization strategies.
• A potential shift toward a more pro-growth fiscal stance by highly rated eurozone countries.
• Any indication of changes in the European Central Bank's (ECB's) monetary policy under Ms. Lagarde's leadership.
• Progress in the tasks necessary to complete European banking and capital markets union projects.
• Progress in the legislative process in adopting new Basel capital standards, thereby removing uncertainty for investors, and paving the way for banks to define their capital management strategies.

The net rating bias for financial institutions in EMEA will likely be negative through 2020 as the institutions face an increasingly demanding environment.

The impact of coronavirus on economies in EMEA depends on how long the outbreak lasts.  The likely loss in Chinese economic growth this year due to the novel coronavirus is likely to shave 0.1%-0.2% off economic growth in the eurozone and the U.K. in 2020 due to lower goods exports and business investment.

The coronavirus poses a risk of disruption to the European value chain, amplified by the currently low levels of European inventories. Looking at the direct value-chain links to China, the German economy appears to be the most at risk of disruption.

The timing of the peak of infections is an important assumption in our assessment. For now, the shock to the European economy is likely to be felt mostly in the first quarter of this year, although tourism expenditure could take more time to recover than goods exports.

Environmental, social, and governance (ESG) risks play an increasingly important role in EMEA banks' creditworthiness.  ESG risks and opportunities can affect a bank's capacity to meet its financial commitments in many ways. Our analysis of 52 of the largest banks in EMEA suggests that:

• For about 14% of these banks, ESG-related factors directly influence their credit quality, either more positively or negatively than for their peers.
• Governance is the factor that influences most banks' credit quality.
• Social and environmental considerations are increasingly at the heart of banks' sustainability strategies and their boards' considerations, but these factors are, at this stage, less credit-relevant (for full details, see "ESG Industry Report Card: EMEA Banks," published Feb. 11, 2020, on RatingsDirect).

Accommodative monetary policies make room for a potential buildup of asset bubbles and higher risk-taking or irrational pricing.  The impact of low interest rates has been especially pronounced in the household sector, in our view, although some European banking sectors have also been seeing growth in lending and an increase in leverage in the corporate segment, supported by attractive refinancing terms. We have seen strong competition among lenders, which, coupled with household mortgage demand above historical levels in most European countries apart from Spain, has been driving household debt upward. Regulators are carefully monitoring this as a potential source of vulnerability. As a result, macroprudential restrictions have been enacted in 19 EU countries where there are concerns that the housing market could start to overheat.

Extremely accommodative monetary policies leave the door open for imbalances that could affect the banking sector. We monitor closely the evolution of property prices, particularly in regions that have recently experienced continuous growth, and cases of prolonged growth in private-sector credit outpacing growth in GDP. Ongoing price distortions in the market across sovereign, corporate, or bank debt could lead banks to either take more risks in an increasingly competitive and disintermediated environment, or to engage in irrational pricing, the negative effects of which would only become evident over time.

The low-for-longer interest rate environment may affect economic growth in the medium term.  The unintended consequences of low or negative interest rates may dampen economic growth in the medium term. For example, in some European countries with a tradition of investing in short-term savings accounts, households have recently been adding more than usual to these accounts. More saving means less spending, which ultimately will affect economic growth. Similarly, some companies are having to set aside or invest more cash in their pension funds to ensure employees receive a certain amount of benefits. And in the Netherlands, some of the larger pension funds are contemplating reducing benefits where regulation permits. In these circumstances, capital investment and consumption could decline to the detriment of production capacity and potentially, economic growth. Unsurprisingly, as a result, insurance companies and pension funds are seeking out alternative higher-yielding investments within their capital and regulatory constraints.

Negotiations between the U.K. and EU will determine the future terms of trade for key sectors.  The U.K. left the EU on Jan. 31, 2020, and entered a transition period that ends on Dec. 31, 2020, unless both sides agree on an extension. The focus has now shifted to complex trade talks, which means that Brexit-related uncertainties will continue to influence the growth strategies and investment decisions of businesses from various economic sectors, including the U.K.'s highly competitive financial services sector.

Our central assumption is that the trade terms between the U.K. and the EU will not take a rapid turn for the worse. This assumption would not hold true, if, for example, the trade terms between the U.K. and the EU regressed to World Trade Organization norms. This would imply the imposition of significant tariffs and barriers between the U.K. and the EU.

For U.K. banks, political risk has not gone away.  In recent years, market participants' sentiment in the U.K. has been dominated by Brexit-related political uncertainty. The banking sector has felt the effects through mixed consumer confidence, lower business investment, and uncertain prospects for public policy. This year appears somewhat different, following the conclusive outcome of the December 2019 general election and the U.K.'s departure from the EU on Jan. 31, 2020. Nevertheless, the U.K.'s future relationship with the EU remains uncertain.

Banks remain focused on profitability and business-model reshaping.  Banks are acknowledging their inability to achieve previously communicated profitability targets in light of the more challenging environment. And some are taking remedial steps. HSBC, for example, has indicated that it wants to restructure its underperforming European and U.S. businesses significantly. Commerzbank AG and AXA have announced their intentions to dispose of mBank and AXA Bank, respectively, suggesting they are reallocating resources to increase their focus on technological innovation and digitalization and their core business. Other banks will likely follow suit in 2020.

Banks enjoy comfortable liquidity buffers.   Financing conditions in the eurozone are highly favorable given the record-low deposit rate of -0.5% of the ECB, and our expectation that the first rate hike will not occur before 2022 at the earliest. The ECB's resumption of its €20 billion per month asset purchase program, as well as the maturity extension of the latest targeted longer-term refinancing operations to three years, aim to provide banks with ample liquidity in the debt markets, albeit partly at the expense of their profitability.

The results of the ECB's 2019 liquidity stress test confirmed that most of the 103 European banks included in the exercise enjoy comfortable liquidity and would have the capacity to withstand adverse and extreme liquidity shocks. Only four entities were identified as unable to survive for six months under the baseline scenario, which assumes a freeze of wholesale markets but no deposit withdrawals. We don't expect banks' liquidity buffers to change materially following the stress test. But the exercise will probably help to improve the consistency of banks' liquidity reporting and the rigor of banks' internal liquidity stress-testing processes.

Deutsche Bank has reported upbeat fourth-quarter results.  On Jan. 30, 2020, S&P Global Ratings stated that its ratings on Deutsche Bank AG (BBB+/Stable/A-2) were unchanged after the bank announced its preliminary results for fourth-quarter and full-year 2019. Beyond the headline reported post-tax loss of €5.3 billion, the core bank's underlying return on tangible equity (ROTE) was around 4%. We see the results and broader business developments as consistent with the central expectations underpinning our affirmation of the ratings in December 2019. While we expect transformation costs to continue to weigh on the bank's reported results in 2020, we see this year as critical for the bank to deliver the efficiencies and investments that are key to it achieving management's 8% ROTE target by 2022.

Deutsche Bank's management struck a positive, though cautious, tone as it confirmed that the bank had hit all of its 2019 financial targets. Amid the heavy operational restructuring, we take balance sheet resilience as a given. Nevertheless, the bank's capital ratios--a common equity Tier 1 ratio of 13.6% and leverage ratio of 4.2%--beat market expectations; the still-solid liquidity coverage ratio of 141% was supported by a €55 billion buffer of excess liquidity; and asset quality remains benign.

The bank made faster progress than we expected in accreting capital from winding down legacy exposures in the capital release unit. Importantly, management reported that the investment bank saw a smaller negative effect on its client activity than it had anticipated after the divestment of equities in mid-2019.

The departure of Credit Suisse's CEO may not instantly disperse the clouds hanging over the group.  Earlier this month, we stated that Credit Suisse Group AG's appointment of a new CEO showed a rising risk of lasting damage to the group's franchise following revelations that two former executive board members were placed under surveillance. The group announced the resignation of CEO Tidjane Thiam, and the appointment of Mr. Thomas Gottstein as his replacement, effective Feb. 14, 2020, the day after it presented its fourth-quarter and full-year results for 2019. Mr. Gottstein was the CEO of the group's Swiss domestic banking division, Swiss Universal Bank, and its domestic subsidiary.

In our view, these decisions may allow management to refocus on strategic execution. However, we note that the Swiss authorities' investigations into the staff surveillance issue are ongoing and the group has now lost three executive board members in quick succession. We think the clouds hanging over Credit Suisse could remain until the authorities' investigations are over and the new CEO has steered the group through several quarters. That said, the appointment of a highly experienced internal successor also implies that the group hasn't changed its strategic priorities, which we believe position it well for the future.

We believe Credit Suisse's franchise is solid enough to likely withstand the developments of recent months. However, we will monitor the future evolution of the relationships between the new CEO, the board of directors, and the shareholders, as well as the business impact of this episode, notably on the wealth management and Swiss domestic divisions.

For most emerging banking sectors globally, as well as those in EMEA, geopolitical risk, asset quality, and capital-flow volatility remain the key risks.  We think that overall, global financial conditions should remain accommodative this year for emerging market banks with good credit fundamentals. Our concerns over weaker growth in Europe and China remain, but our estimate of the risk of a recession in the U.S. in the next 12 months is now 25%-30% compared with 30%-35% previously, thanks to resilient consumer spending. This, and the more than $10 trillion of debt globally with negative yields, means that capital markets will remain accessible for emerging markets with a good credit standing, especially as investors hunt for better returns.

We consider the top risks for emerging markets to be a disruption in global trade flows, volatile capital flows and currency pressures, geopolitical tensions and domestic policy uncertainty, and commodity price volatility. These are the common key risks shared by the majority of emerging market banking sectors globally, as well as those in EMEA.

Geopolitical risk remains elevated in the Gulf Cooperation Council.  Event risk escalated rapidly in the Middle Eastern Gulf region following recent developments between Iran and the U.S, but have now receded. We expect that tensions will intensify and recede periodically, but we maintain our base-case assumption that any action by either side is unlikely to lead to a fully-fledged direct military confrontation. In our view, both the U.S. and Iran are keen to avoid direct conflict as this would be economically, socially, and politically destabilizing for the entire region, including U.S.-Gulf allies. It would also prove to be highly politically contentious in the U.S. in the run up to the 2020 presidential election.

We consider that a potential intensification of proxy conflicts will further undermine confidence and investment in the region. In our view, if a protracted and wider conflict occurs, assuming that export routes remain functional, the fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and potentially on asset valuations, including real estate, as well as weaker economic growth. In the case of a significant increase in tensions, investors could shift their attention to more stable regions. This would prompt an increase in funding costs, a reduced appetite for regional instruments, or major foreign funding outflows.

Key Banking Sector Risks In EMEA

The table below presents S&P Global Ratings' views about the key risks and risk trends for banking sectors in EMEA countries where we rate banks. For more detailed information, please refer to the latest Banking Industry Country Risk Assessment (BICRA) on a given country. According to our methodology, BICRAs fall into groups from '1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10').

Selected Research

We have recently published a number of articles highlighting our views on EMEA banking sectors:

• The Energy Transition: How It Could Affect GCC Banks, Feb. 16, 2020
• Led By Green Bonds, The Sustainable Debt Market Looks To Surge Ahead, Feb. 13, 2020
• ESG Industry Report Card: EMEA Banks, Feb. 11, 2020
• Bulletin: Credit Suisse CEO's Exit May Not Instantly Disperse Clouds Over The Group, Feb. 7, 2020
• Europe's Distressed Debt Purchasers In 2020: Growing Out Of Trouble Or Running To Stand Still?, Feb. 3, 2020
• South Africa 2020 Banking Outlook: A Weak Economy Overshadows The Sector’s Resilient Performance, Feb. 3, 2020
• Rating Factor Assessments For European Financial Services Finance Companies (January 2020), Jan. 31, 2020
• French Banks: Credit Losses Pose Less Of A Risk Than Low Margins On Home Loans In 2020, Jan. 30, 2020
• Bulletin: Deutsche Bank Springs Upbeat Fourth-Quarter Results Ahead Of Its Critical 2020 Execution Period, Jan. 30, 2020
• The Labors Of Hercules: Still Not Enough To Turn Around Greek Banks, Jan. 27, 2020
• Banks In Emerging Markets: 15 Countries, Three Main Risks, Jan. 20, 2020
• Banking Industry Country Risk Assessment Update: January 2020, Jan. 20, 2020
• Geopolitical Uncertainty, Shaky Investor Confidence, And Problematic Assets Continue To Plague MENAT Banks, Jan. 7, 2020
• U.K. Banks Ease, Rather Than Roar Into The 2020s, Jan. 7, 2020
• U.K. Banking Group Ratings Unaffected By Outlook Revision To U.K. Sovereign, Dec. 18, 2019
• Banking Industry Country Risk Assessment Update: December 2019, Dec. 17, 2019
• U.K. Banks' Latest Stress Tests Confirm Balance Sheet Resilience, Dec. 17, 2019
• Research Update: Deutsche Bank AG 'BBB+/A-2' Ratings Affirmed On Early Progress In Restructuring; Outlook Stable, Dec. 16, 2019
• Research Update: UniCredit Bank And UniCredit Austria Affirmed At 'BBB+/A-2' On Changes To The Group's Structure; Outlooks Still Negative, Dec. 12, 2019
• Low For Longer: Our Credit Loss Estimates For U.K. Banks, Dec. 5, 2019
• Bulletin: Digital Lender Bank Norwegian Now Considered Critical Player In Norway, Nov. 29, 2019
• Banking Industry Country Risk Assessment Update: November 2019, Nov. 28, 2019
• Global Outlook: Banks Can Largely Fend Off Tougher 2020, Nov. 18, 2019
• Nordic Banks' Capital And Earnings Can Weather The Weakening Credit Cycle, Nov. 14, 2019
• A Slowdown In Unsecured Retail Lending Would Limit Russian Banks' Credit Risks, Nov. 12, 2019
• Banking Industry Country Risk Assessment Update: October 2019, Oct. 29, 2019
• Various Rating Actions Taken On Five Danish Banks As Denmark's Banking Market Offers Mixed Blessings, Oct. 23, 2019
• Bulletin: Banking Industry Country Risk Assessment For Iceland Unaffected By The Country's FATF Grey Listing, Oct. 23, 2019
• For The FMI Industry, Global M&A Remains An Elusive And, For Now, Unnecessary Dream, Oct. 10, 2019
• ECB's 2019 Stress Test Confirms Eurozone Banks Have Adequate Liquidity, Oct. 10, 2019
• Countdown To Brexit: No-Deal Risks Revisited, Oct. 4, 2019
• Bulletin: Credit Suisse Group AG's Management Turnover Is Unlikely To Undermine Strategic Execution, But Reputational Risk Remains, Oct. 1, 2019
• Bulletin: Russia's Banking Industry Country Risk: More Stable Funding Profile Favors Larger Banks, Oct. 1, 2019

The Future Of Banking

Technological disruption leads to new customer expectations and new forms of competition, but also offers new opportunities for banks. All these trends may ultimately influence the credit profiles of banking industries across the globe. We have published a number of articles highlighting our views on the readiness of various banking sectors to face the challenges and opportunities arising from the development of financial technology and digital transformation:

• The Future Of Banking: When Central Banks Go Crypto, Feb. 11, 2020
• Tech Disruption In Retail Banking: The Regulator Is Moving Israeli Banks Into A Digital Future, Feb. 5, 2020
• Tech Disruption In Retail Banking: Nordic Techies Make Mobile Banking Easy, Feb. 4, 2020
• Tech Disruption In Retail Banking: Austrian Banks' Bricks And Clicks Model Still Does The Trick, Jan. 29, 2020
• Tech Disruption In Retail Banking: GCC Banks Are Catching Up As Clients Become More Demanding, Sept. 8, 2019
• The Future Of Banking: Fintech's Prospects In The Middle East And Africa, June 10, 2019
• Tech Disruption In Retail Banking: France's Universal Banking Model Presents A Risk, May 14, 2019
• Tech Disruption In Retail Banking: Swedish Consumers Dig Digital--And Banks Deliver, May 14, 2019
• The Future Of Banking: Will Retail Banks Trip Over Tech Disruption?, May 14, 2019

Economic, Sovereign, And Other Research

• Coronavirus Increases Risks For Gulf Economies, Feb. 16, 2020
• The Energy Transition: The Clock Is Ticking For Middle East Hydrocarbon Exporters, Feb. 16, 2020
• Coronavirus Impact: Key Takeaways From Our Articles, Feb. 13, 2020
• Sustainable Finance: Equity Content And Sustainability-Linked Hybrids, Feb. 10, 2020
• Coronavirus Could Pressure China's Local And Regional Governments, Feb. 4, 2020
• Research Update: Turkey Foreign And Local Currency Ratings Affirmed; Outlook Stable, Jan. 31, 2020
• United Kingdom: Brave New World, Jan. 30, 2020
• Global Sovereign Rating Trends 2020: Sovereign Debt Buildup Continues, Jan. 29, 2020
• EMEA Emerging Markets Sovereign Rating Trends 2020, Jan. 29, 2020
• Research Update: United Kingdom Outlook Revised To Stable; 'AA/A-1+' Ratings Affirmed, Dec. 17, 2019
• Credit Conditions EMEA: Low Growth, Lower Rates, Dec. 3, 2019

BICRA Changes

Over the past quarter, we made the following changes to our Banking Industry Country Risk Assessments (BICRAs):

Denmark

We have revised our economic risk score for Denmark to '2' from '3'. Private-sector leverage and households' vulnerability to interest rate hikes have decreased, and the share of amortizing mortgages continues to rise, supporting stability in the banking sector. The household sector continues to deleverage as a share of national GDP, with gross debt dropping to 115% in 2018 from 143% in 2009. Furthermore, macroprudential measures are proving successful in increasing the share of amortizing mortgages or those with fixed interest rates. We expect both of these trends will continue, and that gross household debt will decrease to 110% of GDP in 2021 from 115%. With the change to the economic risk score, we have revised our economic risk trend for Denmark to stable from positive.

We have also revised our industry risk score for Denmark to '4' from '3'. We see higher industry risk for Danish banks, stemming from pressure on earnings. Profitability in the Danish banking market had been improving, with the sector's return on equity rising to above 11% in 2017 from negative territory in 2009. The increase was largely caused by improving credit conditions and higher pricing in the mortgage segment. Moreover, after several years of improvement, mortgage administrative margins are again declining as borrowers move to less risky products, and deposit-taking institutions are seeing their interest margins pressured by the country's negative interest rate environment, with the central bank's deposit rate negative 0.75% since September 2019. In addition, mounting price competition in the context of limited credit growth, in particular for corporate clients, and intensifying efforts in compliance and anti-money laundering further pressure the banking sector's earnings outlook.

Greece

We have revised our BICRA for Greece to Group '9' from Group '10', and our economic risk score '9' from '10'. We believe that the ongoing recovery in the economic and operating environment in Greece is gaining momentum, which we view positively for Greek banks' financial profiles. We project that the Greek economy will grow by around 2.5% on average over 2019-2022--well above the eurozone average--as domestic demand strengthens and solid export performance continues.

Fundamentals for Greek banks are improving since the conclusion of the three-year European stability mechanism program on Aug. 20, 2018. In September 2019, the remaining capital controls in the Greek banking system were lifted without any adverse impact on deposit trends. The commitment of the former and the new governments to structural reforms is bearing fruit, as evident from improving sentiment, both domestically and among foreign investors.

We have revised our industry risk trend for Greece to positive from stable. With the bottoming-out of prices in the domestic real estate market and improving recovery prospects, economic risks could ease further.

Hungary

We have revised our BICRA for Hungary to Group '5' from Group '6', and our industry risk score to '5' from '6'. As a result, we have revised our anchor, or starting point, for rating a bank operating solely in Hungary to 'bbb-' from 'bb+'. We consider that the system has successfully resolved many of its past shortcomings. In particular, we believe the systemwide funding profile has improved, since banks are now financing lending primarily with customer deposits, which are spurred by increasing wealth levels. Narrower funding gaps at the system level have helped stabilize the sector as a whole, and slightly reduced the confidence-sensitivity of banks, which previously relied on external funding for growth. We also see signs of improving access to external capital markets, further supported by our recent upgrade of the sovereign.

In our view, the increasing track record of effective regulatory measures and banks' sustained prudence in lending standards, relatively robust margins, and decreased share of higher-risk loans, spurred by the economic upswing, have contributed to an overall reduction in Hungarian banking system risk.

Kazakhstan

We have revised our economic risk score for Kazakhstan to '9' from '8'. We believe that Kazakh banks will show elevated credit losses for longer than we previously expected, putting pressure on the banks' S&P Global Ratings-risk-adjusted capital ratios. We anticipate that provisions for credit losses in the system will increase to about 5% of total loans in 2019, and remain elevated at 3%-4% in 2020. We expect that provisions will return to normal levels of about 2.0% in 2021, closer to 2.2% in 2018.

Lebanon

We have revised our industry risk score for Lebanon to '10' from '8'. In our opinion, private individuals' lack of access to their bank deposits on time and in full, different remuneration from the original contractual terms, and constraints on their ability to transfer funds abroad constitute a risk for depositors of losing the benefit of their agreements and, therefore, a selective default. We also believe that some of these measures could be tightened in the future, since liquidity in Lebanon appears to be diminishing, causing banks to possibly face near-term mounting pressure on their funding positions. At the same time, we consider that these risks have been exacerbated by regulatory inability to prevent, in the past, the buildup of imbalances in the banks' balance sheets, both on the funding and asset sides. Although the central bank's recent financial engineering operations have boosted banks' profitability, they also resulted in a further increase in banks' Lebanese sovereign exposure. Moreover, because we expect economic conditions to remain stressed in the coming years, we don't expect inflows of deposits to resume, thus likely keeping the banking system's funding structure under pressure.

Ukraine

We have published a Ukraine BICRA assessment, classifying the Ukrainian banking sector in Group '10' under our methodology. This reflects an economic risk score of '10' and an industry risk score of '9'. We see stable trends for both economic risk and industry risk.

Economic risk in the Ukrainian banking system remains among the highest in a global comparison, despite notable improvements in the macroeconomic environment over the past four years and expected macroeconomic stability in 2019-2021. We expect the Ukrainian economy to expand at an average of 3.0% in the coming two years, supported by domestic demand, reducing inflation, and a slight depreciation of the hryvnia. We believe that the Ukrainian economy remains in a prolonged correction phase, but its impact on the banking system has subsided due to normalized credit costs. We view extremely high credit risk as a key weakness for the banking system. The system's reported nonperforming loans (NPLs; loans over 90 days overdue) stand at about 52%, mainly reflecting very weak asset quality at state-owned banks, high related-party lending, a substantial share of loans in foreign currency, and still-pending mechanisms for an orderly NPL resolution.

We think that the industry risk for banks in the country has reduced but remains very high in global terms. We believe that banking regulation and supervision have strengthened materially over the past four years under the management of new governors of the central bank. The central bank is striving to preserve its independence and harmonize the regulatory framework with international standards. Although many of the weaker banks have exited the banking system, a high share of state-owned banks and, although not our base case, possible unfavorable court decisions regarding Privatbank's nationalization are affecting the system's stability. The banking system's funding profile is stable, with expected core customer deposits to net loans remaining well in excess of 100%, supported by healthy growth in deposits and net banking sector external debt of close to zero.

Chart 1

About 71% of all outlooks on bank ratings in EMEA are stable, nearly 12% are positive, and about 17% are negative. In Western Europe, almost 71% of ratings have stable outlooks, with negative outlooks accounting for almost 18% of ratings, and positive outlooks accounting for nearly 11% of all ratings. For emerging market banks in EMEA, about 73% of ratings have stable outlooks, with negative outlooks accounting for nearly 13% of ratings, and positive outlooks accounting for nearly 13% of all ratings.

Chart 2

Table 2

Table 3

Recent Rating Actions: EMEA Banks

Table 4

Recent Rating Actions/Resolution Counterparty Ratings: EMEA Banks

On April 19, 2018, we published a criteria article, "Methodology For Assigning Financial Institution Resolution Counterparty Ratings" (the RCR criteria) and an associated guidance document "Guidance/Criteria/Financial Institutions/General: Methodology For Assigning Financial Institution Resolution Counterparty Ratings," which is intended to be read in conjunction with the RCR criteria.

Subsequently, we assigned resolution counterparty ratings (RCRs) to selected European banks that we expect to be subject to an effective bail-in resolution if they reach the point of nonviability. This is to reflect the fact that in a resolution scenario, certain banks' liabilities will be excluded from bail-in, and therefore will have a lower default risk than traditional senior obligations. Over the past quarter, we have assigned RCRs to the selected European banks in table 5 below.

Table 5