After a year of pandemic-induced turmoil and deep uncertainty, from mid-2021 we took generally positive rating actions across the European banking sector as economic recovery took hold and downside risks eased. We also took a few positive rating actions after we released our updated Financial Institutions Rating Methodology (see Annex), most usually linked to further recognition of banks' bail-in buffers and the improved prospects for senior preferred creditors in a nonviability scenario.

As a result, our ratings on the sector started 2022 with an essentially neutral outlook bias, with around 80% of the larger European banks with stable outlooks (see chart 1). The latter echo the negative trends we see for some of our banking industry country risk assessments (BICRA) in Europe, as well as idiosyncratic factors for some banks (see charts 2 and 3).

Beyond the base case, we see the risk of broader rating actions as biased to the downside. Upside potential seems limited to a few cases, typically in the eurozone periphery, where banks could benefit from a structural improvement in sovereign creditworthiness or asset quality. We remain mindful of comparability with peers in other regions, and for most European majors there is little reason to envisage that they deliver a structural improvement in balance sheet strength or business strength and profitability. Indeed, across the European sector as a whole we see latent risks arising from four areas: real estate asset bubbles forming in some markets, asset quality suffering far more than we expect, a disorderly reflation scenario that exposes asset and market risks and raises costs, and individual banks failing to deliver commercially and operationally resilient business models.

We discuss below some of the broad trends that we see across the European banking sector, and conclude with a series of system-by-system summaries that explain our current rating positioning and features specific to those markets. Note that we released our updated Financial Institutions Rating Methodology in December 2021, and we have not yet concluded our first-time review of banks under the methodology. While we don't expect any further related rating actions, for some banks the ratings constructs shown in these charts could change as we implement the methodology. 

Profitability: We Revised Up Our 2021 Earnings Forecasts, But Remain Cautious On 2022

As banks report full-year results in the coming weeks, we expect 2021 to have been a relative "feel good" year after 2020. As the year went on, our analysts typically revised up assumptions for bank profitability as loan impairments tracked below expectations and revenues held up better than we had expected. Operating expense experience likely varied significantly, depending on each bank's cost reduction ambition, the extent of investments, and variable compensation in what was generally a strong year for capital markets players. Investor focus will likely center on shareholder distributions and forward-looking trends on revenues and costs.

For 2022, we see few reasons to be optimistic on preprovision profitability or overall returns, despite a steeper yield curve that could be modestly supportive. Structural profitability remains a major challenge in many national European banking markets (see As Near-Term Risks Ease, The Relentless Profitability Battle Lingers For European Banks, published June 24, 2021). Despite a stronger-than-expected 2021, we only slightly revised up our 2022 expectations for preprovision profitability, and we now expect median RoACE (return on adjusted common equity) of only 6.2% (after an expected 6.6% in 2021), with very few banks above 8% (see charts 4, 5, and 6). Policy rates have started to rise in the U.K., Norway, and many central and east European countries, but not the eurozone or Switzerland.

Yield curve steepening through 2021 is more supportive of forecast bank interest margins, but in June the European Central Bank is due to end its 50 basis point discount for banks that are net lenders to the economy. Capital markets players had a bumper 2021, but will find it hard to repeat these activity levels. Despite best efforts on cost-cutting, inflation is an important headwind and more banks could announce more sizable restructuring costs. On credit, 2021 was a year of net releases for some banks, and even if new provisions don't spike, these releases will likely peter out (see chart 7).

Asset Quality Has Held Up Better Than We Expected, But Remains A Differentiating Factor

Unemployment and corporate insolvencies will likely start to rise through 2022, but across Europe we now see that unprecedented fiscal support, much of which continued into early 2021, has averted widespread problems now appearing in specific markets. Apart from a few players, asset quality risk is therefore no longer driving negative outlooks, but it could remain a key area of differentiation for several reasons:

• Provisioning prudence has varied. For some banks the question is whether they can fully release the spike in 2020 provisions, but this depends in part on whether their economic projections support this; for others, the question is how much additional provisioning is still needed.
• Variable core profitability means that some banks are far more able to absorb a spike in impairments through preprovision earnings, and so remain comfortably profitable.
• Asset quality will vary depending on the balance of banks' loan books to corporate, small and midsize enterprises (SMEs), retail mortgages, and consumer portfolios--and we continue to expect retail mortgage portfolios to be the least affected asset class.
• As the ECB has confirmed, aside from provisioning, banks' credit risk management practices vary significantly--some have been proactive, others less so.

Looking beyond the near term, we see climate change and low carbon transition as a potential opportunity for banks given the huge investment needed and their role in intermediating it, but also a crucial latent risk. Preliminary studies by regulators indicate that few European banks face direct physical risk, but they have long-term exposures to companies, some of whom may struggle to transition, and households--often backed by collateral whose value could fall materially. For roughly half of the banks surveyed by the ECB in 2021, climate risks will have a material effect in the short-to-medium term. Despite that, only a few institutions have put in place climate risk practices in line with supervisory expectations. Integrating climate risks across the full spectrum of risk management activities will require major efforts for banks in the months and years to come. While not yet a material rating driver, we engage actively with banks on this topic, and will closely watch the results of the ECB stress test on climate risks, due to be published in summer 2022.

Banks Will Deepen Their Focus On Competitive Advantage, Reduce Structural Costs, And Pursue Consolidation

Our base case of flat eurozone policy rates until 2024 and a shallow yield curve points to limited growth prospects in revenues for many players. The imperative of significant cost rationalization undoubtedly varies markedly across the region. Despite some market exits by subscale retail players in countries like Ireland and France, many national banking markets remain overbanked. In every market, future competitiveness relies on a credible customer proposition and resilience in the face of ultra-commoditization of some savings and credit products. Underlying wage inflation and the attendant investment and restructuring costs will constrain banks' ability to quickly realize significant cuts in operating expenses, but the cost of inaction would be far more damaging in the long term. At the same time, bank management teams and investors increasingly recognize that sustainable returns mean not only delivery of adequate profitability but broad stakeholder value--for their customers, employees, and society as a whole.

On consolidation, regulators will not cheerlead individual deals given the associated operational and financial risks, but they remain acutely aware that sustainability and financial risks can only grow in overbanked markets (see ECB Confirms Easing Of Regulatory Hurdles To Eurozone Bank Consolidation, published Jan. 21, 2021). Even then, in-market consolidation remains more compelling for bank shareholders, given the significant ability to realize cost synergies and the absence of cross-border impediments to the free flow of resources that continue to undermine the completion of the Banking Union. The failure to make progress also stalls a conclusive shift in market perception of eurozone banks' fortunes being fundamentally bound up with those of their domestic economies and sovereigns.

Our Capitalization Base Case Shows A Modest, But Not Troubling Reduction

Through end-September 2021, EU banks' regulatory capitalization remained resilient, with the European Banking Authority (EBA) reporting a sector average common equity Tier 1 (CET1) ratio of 15.4% and leverage ratio of 5.7%. We expect little change at end-2021, but see the sector as having now hit the highwater mark, and so anticipate moderately reduced ratios by end-2022 for most banks. In many ways, this would imply a return to more business-as-usual conditions for banks: the resumption of dividend payments, some increase in risk-weighted asset (RWA)/business growth, and a gradual removal of regulatory relief granted in 2020. Capitalization notably does not appear as a high-risk item for either the U.K. PRA's Dear CEO letter, the EBA risk dashboard, or the ECB's supervisory priorities.

We will monitor the path of the EU's CRD V/CRR legislation as it moves to implement the remaining elements of Basel III from 2025. We anticipate final legislation to remain very close to the Commission's proposal (see Basel III Bank Capital Rules In Europe: Delayed And Diluted, published Oct. 28, 2021). More interesting perhaps will be the speed at which jurisdictions reimpose countercyclical buffers. Germany, the U.K., Switzerland, and Norway already started, but we expect others to follow. Given that the vast majority of rated EU banks will maintain substantial headroom over their SREP-MDA thresholds, we expect additional Tier 1 (AT1) coupon nonpayment risk to remain low.

Funding And Liquidity Will Remain Comfortable, Even If Markets Tighten

None of the major European regulators currently cites funding and liquidity as a key risk for their banks. European banks remain flush with deposits after the surge in excess saving during 2020, most TLTRO III (targeted longer-term refinancing operations) drawings will not need repayment before 2023 and most banks do not rely on them structurally, and central banks have proven themselves to be highly accommodative if the market tightens.

Assuming that the ECB does not decide to extend its TLTRO III program, we expect eurozone banks to have started to position themselves for TLTRO III repayment, beginning in September 2022 and running through into 2024. Notably, this could lead banks to run down balance sheet liquidity moderately and tap secured markets. We see any negative consequence as more related to profitability than to funding or liquidity risk. Indeed, if markets tighten severely, we consider it likely that the ECB would consider another round of TLTRO financing.

We expect that European banks will remain highly active in the AT1 market, as long as market pricing remains attractive. Looking beyond the equity-heavy mutuals, there are still many banks that have some unused AT1 capacity, and others will just look to replace Basel III instruments issued in 2017 which will hit their first call dates. Tier 2 (T2) issuance depends in part on these dynamics also, and some of the banks also continue to optimize the mix of T2 with MREL-eligible senior nonpreferred debt.

The EBA survey confirms our expectation that EU banks will continue to be substantial net issuers of MREL (minimum requirement for own funds and eligible liabilities) in 2022, as they seek to meet regulatory requirements by 2024. We expect MREL net issuance to remain strong in 2022 and then slow during 2023 as many will have built their buffers and so look to rather roll maturities and only gradually raise buffers in line with modest balance sheet growth.

Some European banks have been active issuers of green and social bonds, a market that continues to develop and which shows a modest pricing premium to vanilla issuances (see Green Liquidity Moves Mainstream, published July 8, 2021). We expect this trend to continue, particularly if growth in banks' customer deposit balances stalls or reverses. We see this issuance as not only cost-effective but also potentially franchise-enhancing. However, issuers will need to evolve as the market standardizes and investor expectations about demonstrable additionality rise (see The Fear Of Greenwashing May Be Greater Than The Reality Across The Global Financial Markets, published Aug. 23, 2021).

Resolution: Limited Further Upside From ALAC Notching

European banks continue to make steady progress on resolvability, and in 2022 we will see the first disclosures of the resolvability assessments made by the Bank of England (BOE) and Single Resolution Board (SRB) (following in the footsteps of the Swiss Financial Market Supervisory Authority, FINMA). The expansion of banks' subordinated bail-in buffers continues to result in occasional upgrades when it leads us to factor in more uplift for additional loss-absorbing capacity (ALAC) in the issuer credit rating (ICR).

We remain doubtful that ALAC uplift will become far more widespread beyond the existing 50-60 European banks. This primarily reflects that we see the asset transfer and purchase and assumption resolution strategies for many smaller banks as unlikely to ensure full and timely payment on all senior preferred obligations. Second, even where the strategy appears supportive, many EU banks will continue to rely heavily on senior preferred debt to meet their MREL requirement.

The EBA reports that 40% of the banks it surveyed identify pricing as a constraint on issuing MREL, and yet spreads remain tight and the market supportive. For sure, banks with deposit-heavy funding structures could struggle to deploy long-term wholesale funding productively unless they take on more asset risk. But the banks' bigger problem is arguably rather their tight core profitability and already depressed net interest margins. We do not expect the resolution authorities to delay MREL implementation or to backtrack from the shift to bail-in from bail-out. We rather expect that the EU will introduce legislation to seniorize all deposits relative to other senior preferred liabilities, as countries like Greece, Italy, and Portugal have already done. This would further isolate senior preferred debt and reinforce resolution authorities' willingness to bail it in where the bank lacks a substantial subordinated buffer. (See The Resolution Story For Europe's Banks: More Resolvability, Consistency, Credibility, published Oct. 5, 2021.)

Exploring The Four Key Risks Under Our Economic Base Case And Alternate Scenarios

Our economists acknowledge that U.S. inflation remains elevated, with increasing evidence of demand-led pressures, and that the U.S. Federal Reserve has concluded that policy accommodation should be withdrawn sooner than expected. They now expect net asset purchases to end by March 2022 and the Fed to raise rates by 25bps three times this year. Balance sheet normalization could start as early as 2023. While these Fed actions will put pressure on other central banks to raise rates further, this applies mainly in emerging markets.

By contrast, demand-driven inflation pressures in the eurozone are largely absent (consumer spending is still below pre-COVID-19 levels), and inflation pressures remain less broad based than in the U.S. and U.K. As a result, the ECB remains on hold in 2022 and into 2023. Still, risks to the base case remain on the downside. On the pandemic front, the Omicron surge may be less short-lived and successive variants of the virus could be more virulent. On the inflation front, the oil market may not rebalance quickly, and geopolitical pressures could increase not ease (see Macroeconomic Update, published Jan. 20, 2022).

Base case risk: A sharp rise in residential real estate turns into bubbles in resilient economies.   Residential real estate prices soared in 2021, after the hiatus in activity in mid-2020, and propelled by accumulated savings (for many households), a common desire for larger living space, and still super-low mortgage rates. Under the fairly benign economic base case, economic growth will support all actors--governments, corporates, and households. This is supportive of bank asset quality, but low core inflation would support low-for-long policy interest rates and the yield curve would not steepen significantly. Combined with easy liquidity that the ECB only gradually squeezes, this could support persistent strong credit supply and demand for residential mortgages. Markets like Sweden, The Netherlands, Ireland, and Germany saw high-single-digit or even double-digit annual growth in residential real estate prices in 2020/2021. We currently expect this to normalize through 2022/2023 to low-single-digits, but this could prove optimistic for some markets (see European Housing Market Inflation Is Here To Stay, published Nov. 2, 2021). So far, only a few authorities started to reinstate countercyclical buffers after the onset of the pandemic (see German Banks Are In A Good Position To Absorb BaFin's Moderate Increase In Macroprudential Capital Buffers, published Jan. 20, 2022), but this is typically enacted with a delay and we see it as having a broad signalling purpose rather than being a real credit supply constraint. Authorities might need to step in with a broad package of macro- and microprudential measures to avoid a prospective bubble scenario. For our part, if we see that such economic risks increase, we could take negative actions on mortgage-centric banks in those markets.

Table 1

S&P Global Ratings Housing Market Forecasts Show Housing Price Inflation Will Moderate In 2022/2023
	2019	2020	2021f	2022f	2023f	2024f
Belgium	4.8	5.7	6.0	2.7	2.4	2.0
France	3.8	6.4	5.5	4.5	3.5	3.0
Germany	6.4	8.7	9.0	5.7	4.5	3.8
Ireland	0.8	0.7	8.0	4.0	3.5	3.5
Italy	0.3	1.6	0.4	0.8	1.0	1.5
Netherlands	6.5	8.7	12.0	7.8	3.6	3.2
Portugal	8.9	8.6	4.9	5.0	4.6	4.1
U.K.	0.5	6.4	5.0	0.0	1.5	3.0
Spain	3.7	1.7	4.3	4.0	3.6	3.3
Sweden	3.9	10.2	13.0	1.5	2.5	3.5
Switzerland	2.4	5.4	5.5	4.0	3.0	2.6
Source: "European Housing Market Inflation Is Here Tp Stay", published Nov. 2, 2021 on Ratings Direct. f--Forecast. Year on year (%) annual growth in the fourth quarter. Sources: OECD, S&P Global Economics.

Adverse case risk: Economic recovery is delayed and asset quality suffers far more than we expect.  A slightly delayed or softer economic recovery would not be unduly difficult for the banks. But if the recovery falters badly, this could lead to a negative step-change in bank credit quality through late 2022 and into 2023. Unless governments step in with a renewed package of fiscal support, such a setback would likely see banks suffer a rebound in impairment charges (as more borrowers become distressed), as well as lower-than-expected pre-provision earnings. Under this scenario, we see the risk as potentially affecting certain economies more than others, and some banks more than others. Therefore, while we could take negative rating actions, we currently consider it unlikely that it would cut across a swathe of European markets, as in second-quarter 2020.

Adverse case risk: A disorderly reflation scenario exposes asset and market risks for some banks.  If inflation proves stubborn, banks' cost bases would likely come under greater pressure. Furthermore, central banks may choose to raise policy rates faster than we and the markets currently expect. If accompanied by a rise in long-term market rates and therefore a steepening of the yield curve, this would boost banks' net interest income (NII) over time. However, tighter funding conditions would also generate additional credit impairments as the most stretched corporate and household borrowers falter. All in all, these factors would affect banks differently, depending on the duration of their assets and liabilities and idiosyncratic factors in the profile of their borrowers.

Concomitant with this scenario is a potential market reaction that drives a snap back in investor risk aversion, disruption in funding or derivatives markets, and a sharp repricing of debt and equity securities. Under this scenario, we consider the central banks as highly likely to make liquidity available to the banks, albeit that they start 2022 with often outsized buffers. Still, the burden would fall most heavily on those banks with the weakest market access, and significant unhedged mark-to-market assets.

Base and adverse case risk: Individual banks fail to deliver commercially and operationally resilient business models.  Irrespective of the economic scenario, technological advances and customer preferences are leading to structural change in the industry. Digitalization offers a potential lifeline for some European banks to overhaul their operating models and reinforce profitability in the medium term. However, change is rapid, and the risk to incumbents from digital disruption is substantial. We expect all banks to materially transform their technology platforms, but the urgency, budget depth, and quality of execution will vary. Looking longer term, potential step-changes in digital technologies could yet have a profound impact on intermediation between savers and investors, and public authorities and citizens, among other spheres. In turn, this could affect our view of industry competitive dynamics or other key risk factors.

We used our review of European bank profitability in mid-2021 to better reflect the structural challenges in France and Germany in particular, but also Spain and Italy for example. While we see some residual risks around structural profitability in Austria and Ireland, we see European banking systems as now fairly positioned on a relative basis. Therefore, where we see greater risk in future, we are likely to reflect this in our ratings on individual banks, rather than across sectors.

Austrian Banks: Still Vulnerable Despite Recovering Profitability

Key takeaways

• Austrian banks' profitability is rapidly recovering due to decreased risk provisioning amid a strong economic recovery. But the material dip in the banking sector's performance in 2020 and 2021 highlighted many banks' low efficiency and only marginal profitability when risk costs rise, leaving the sector vulnerable to prolonged adverse scenarios. Our outlook for many Austrian banks remains negative because of structural profitability issues. We see a dual challenge to profitability from thin domestic net interest margins and the steady increase in the operational cost base for most banks; together, these pose a medium-term risk to banking system stability.
• We expect that economic recovery will help to limit the residual impact on banks' asset quality. After the sharp GDP contraction of 6.6% in 2020 due to the COVID-19 pandemic, we anticipate a rebound of 3.7% in 2021, 4.2% in 2022, and 2% in 2023, which is slower than what we expect for the eurozone on average.
• While domestic NPLs have not increased, we think they are likely to increase over 2022 to about 2.5% from the current 1.5% as government support measures phase out, decreasing thereafter. At the same time, we think that risk costs are likely to decrease through end-2022 for most banks (reflecting high recent provisioning). We expect the sector's ROA to return to 0.6%-0.7% medium term, including more profitable foreign operations.

What could move bank ratings up?

• Bank-specific factors, such as improving capitalization or profitability, may lead to upgrades or outlook revisions to stable.
• For banks that are subject to an open bank bail-in resolution, we could raise ratings if they accumulate material loss-absorbing buffers and develop credible resolution strategies.

What could move bank ratings down?

• Failure to improve efficiency and to enhance revenues may lead to lower ratings. We think that risks to banking system stability could increase unless Austrian banks speed up their efforts to improve efficiency, with focus on both stringent cost management and revenue expansion, specifically in fee-generating operations. Also, the inability to keep pace with peers with regard to digitalization and customer-facing services, leading to a deteriorating franchise, could lead to downgrades.
• Risks to ratings may also result from rising housing prices that may lead to accumulation of imbalances.
• Downside risks to our economic base-case scenario for the COVID-19 pandemic and higher-than-expected credit losses, leading to a material hit on banks' profitability or capital consumption, could move bank ratings down. Austrian banks have higher sensitivity to adverse scenarios than those in many other markets because of the economy's focus on tourism and related service industries.
• Bank ratings that depend on state support can be sensitive to downgrades of those banks' state owners.

Benelux Banks: Sound Fundamentals And Recovering Profitability

Key takeaways

• Benelux banks have shown resilience during the pandemic and their fundamentals remain sound with overall low risk profile, healthy capitalization, ample liquidity from strong customer franchises, and largely digitally advanced business models. Our economic and industry trends for all three banking systems are stable, leading to stable outlooks on the vast majority of rated banks.
• Profitability metrics largely recovered over the first three quarters of 2021 and for some banks reached their pre-pandemic levels thanks to loan provision reversals. Our forecast of an economic recovery and credit costs closing in to more normalized levels of about 15-20 bps should further support the profitability of Benelux banks. Efforts to grow fee income largely from insurance and asset-management products also help but do not fully offset the negative pressure coming from the persistent low-interest-rate environment, continued investment in digital, and regulatory and compliance requirements. Therefore, further efficiency improvements are important for Benelux banks to sustain profitability.
• Credit growth in Benelux region was quite strong over recent years (with some exceptions in 2020) as households have taken advantage of low interest rates. However, rising indebtedness is not an immediate concern. This is because net wealth levels in Benelux remain among the highest in Europe. We expect credit growth to continue in the Benelux region as investment confidence recovers and believe it likely to exceed GDP growth. That said, in the medium term, such sustained increase in domestic credit versus GDP growth could weigh on economic risk of individual banking systems in the Benelux region.
• Real estate prices climbed rapidly in Luxembourg in recent years, with a particularly strong price increase in 2020. Still, the increases are not primarily fuelled by credit (which could pose financial stability risks)--in our view they are more due to a lack of supply and an expanding population.

What could move bank ratings up?

• For many banks in the region, we see remote prospects for higher ratings as we consider them well positioned versus peers. We do not expect them to change over the next two years.
• We could raise our ratings on some banks if they progress on the build-up of buffers of bail-inable debt or, in some cases, if their resolution strategy changes to that of an open bail-in. For LeasePlan, we could raise the ratings by end-2022 if the proposed acquisition by ALD closes and we consider LeasePlan a core member of the enlarged ALD group.
• For smaller banks operating in specific niches or narrow segments, delivering on their strategy in diversifying their franchise and business models could also support their creditworthiness.

What could move bank ratings down?

• Bank-specific factors that could lead to downgrades vary, but there are several key risks that could potentially weigh on creditworthiness for most Benelux banks. One is a deterioration of the capital position resulting from an unexpected change in capital management policy, either through higher capital distribution than we expect or through overly aggressive growth (organic or M&A). For some banks, downside triggers are linked to profitability levels that could lag behind pre-pandemic levels, worse efficiency or diversification metrics versus peers (for smaller players), and poor delivery on strategic plans.
• For bank ratings that depend on state or group support, ratings can be sensitive to a reduction in the likelihood of that support or to downgrades of their state or other owners.

Central And Eastern European Banks: Profitability Quickly Recovering Amid Rising Interest Rates And Decreased Risk Costs

Key takeaways

• Rated banks in the Czech Republic, Hungary, Poland, and Slovenia have weathered pandemic-related stress well, thanks to prudent risk management in recent years, high gross margins, strong capitalization buffering losses, and ample liquidity buffers. The bulk of the ratings carry stable outlooks, and we see stable economic and industry trends for all CEE banking systems except Poland, whose industry risk trend remains negative due to outstanding litigation relating to franc-denominated mortgage loans.
• CEE sovereigns absorbed the shock from COVID-19 relatively well, thanks to strong macroeconomic fundamentals and flexible policy settings. The output contraction was smaller than in many other regions. In 2021 and 2022, we expect CEE economies to recover by 5% on average, which is supportive for the region's banking sector.
• Profitability metrics recovered strongly over first nine months in 2021, reaching pre-pandemic levels for some banks. We expect further improvement in 2022. Materially decreasing risk costs have driven the recovery and should continue to do so. Revenues have been under pressure as interest rates decreased to historical lows in many CEE countries, but they have recovered in most countries, driven by recent interest rate hikes amid fears of a persistently higher inflation rate.

What could move bank ratings up?

• Upgrades of parent banks in Western Europe may strengthen their ability to support group members.
• For banks that are subject to an open bank bail-in resolution, we could raise ratings if they accumulate material loss-absorbing buffers and develop credible resolution strategies.
• Bank-specific factors, such as improving capitalization, may lead to upgrades. More generally, economic growth and rising wealth levels may also move ratings up.

What could move bank ratings down?

• A material delayed hit from the phase-out of state support programs to private sector could impair ratings. There are risks from the generally high Level 2 loans, which make up about 5%-15% of total loans. Some may turn nonperforming amid the phase-out of support, depleting profitability or capitalization, and lower debt-servicing capacities amid higher interest rates.
• Setbacks in economic growth and political tensions to the detriment of the banking sector could hit ratings. Risks to our macroeconomic assumptions and ratings include weaker recovery due to the pandemic amid lower-than-anticipated success in mass vaccinations, policy missteps, and countries' inability to fully benefit from EU funding.
• Risks to ratings may also result from rising housing prices, which may lead to accumulation of imbalances, or a material increase in private sector indebtedness.

Danish Banks: Solid Asset Quality, Though Profitability Remains Below Peers

Key takeaways

• All Danish banks carry a stable outlook, with the exception of Danske Bank. The negative outlook on Danske reflects the possibility that the outcome of the regulatory investigations might hamper its financial profile.
• Danish banks exhibit relatively low credit losses in a European context, having provisioned prudently to weather the impact of the pandemic on their books. Observed impairments and credit migrations to stage 2 and 3 have been in line with our expectations.
• Banks' robust capitalization offsets profitability pressure. However, limited loan growth, margin pressure, and intense competition, as well as investment in compliance and digitalization, continue to weigh on earnings. We expect banks' capitalization to remain robust in a European context through 2022, supported by the gradual recovery of profitability and moderate payouts to shareholders.

What could move bank ratings up?

• We see limited upside to our ratings on Danish banks over our outlook horizon. All banks benefit from additional loss-absorbing capacity (ALAC) support, apart from Skibskredit.
• For Danske Bank, ratings stability would mostly hinge on the outcome of regulatory investigations and any subsequent impact on the bank's creditworthiness.

What could move bank ratings down?

• The development in house prices and private sector indebtedness could pressure the ratings on Danish banks. Although house price growth has been declining lately, a prolonged and sustained increase in property prices might fuel economic imbalances--putting further pressure on the overall level of debt in the country--and translate into weaker asset quality.
• Prolonged weaker profitability than peers could hamper our view of banks' creditworthiness.
• Anti-financial crime and legacy issues related to conduct risks might weigh on our assessment of banks, as in the case of Danske Bank.

Finnish Banks: Resilient, Supported By Digital Preparedness

Key takeaways

• The Finnish economy and banking sector has performed better than many other European countries amid the COVID-19-induced stress, with government policy measures, high social welfare, and digital preparedness allowing swift adaptation to social-distancing measures. We forecast the economy to grow by 3.0-3.3% in 2021-2022, slowing down to 1.8% in 2023. This will translate into a moderate credit growth over the next two years.
• We expect the largest banks to strive for further digitalization of both their customer offering and internal processes to improve their operating efficiency and to remain resilient against disruption. Nordea Bank is likely to set new strategic goals beyond its 2022 financial targets following the diligent execution on profitability and cost-efficiency measures over the past two years. We expect OP Financial Group to streamline its operating structure, underpinned by mergers between member banks, which it intends to reduce its cost base alongside the digital-first strategy.
• Although the Finnish banking market is highly concentrated, we expect to see further consolidation and potentially smaller acquisitions to strengthen the banks' core businesses. The announced exit of Svenska Handelsbanken from Finland might bring business opportunities for some small and midsize domestic banks.

What could move bank ratings up?

• Given the high ratings on Nordea Bank and OP Corporate Bank by international standards we consider ratings upside remote, as our stable outlooks reflect. We expect both banks to continue building up their additional loss-absorbing capacity by issuing senior subordinated instruments through 2024.
• Improved profitability owing to cost containment and increased digitalization could lead to positive rating actions on some small and midsize banks.
• The positive outlook on Bank of Aland reflects our expectation that sustained robust earnings could lead to a strengthening of its risk-adjusted capitalization over the next two years.

What could move bank ratings down?

• Weaker or delayed improvement in banks' operating efficiency--triggered by lengthy core banking platform overhauls--and overall profitability could lead us to lower our assessment of some smaller banks' business profiles.
• An unexpected weakening of the operating environment for Finnish banks, coupled with increasing private sector debt, could lead us to lower the anchor for Finnish banks. We anticipate the authorities to extend recommendations to prevent excessive growth in household indebtedness during 2022.

French Banks: Diversified Business Models Support High Ratings, Dampened By Structural Profit Pressure

Key takeaways

• Outlooks are largely stable. We expect the economic recovery of European countries to support good commercial momentum and only modest credit deterioration for French banks, after a solid performance in 2021. Pockets of credit risk may surface without an impact on sector performance that we consider material.
• The high ratings on large French banks benefit from good business diversity beyond retail and commercial banking--whether in insurance, asset management, investment banking, or specialist finance, complemented with a buffer of bail-inable debts protecting senior creditors in a resolution. This typically yields relatively stable and recurring earnings through the cycle.
• Nevertheless, longer-term profitability challenges cannot be overlooked, with high competition that weakens risk-adjusted pricing, and digital disruption that gradually erodes revenue for profitable activities. Margins remain ultra-low in core products like mortgages. The focus on cost efficiency and pricing discipline is therefore a key point of attention.

What could move bank ratings up?

• For large banks, we see limited upside in our ratings considering where they now stand. Although unlikely this year, the strategic initiatives of Société Générale, such as the merger of its French networks or adjustment in its investment banking, could make an improved stand-alone assessment possible over time--especially if they deliver a more sustainable and profitable business model on par with higher-rated banks. We could revise our assessment of La Banque Postale's creditworthiness if, contrary to our base-case scenario, the bank rebuilds its capital base after the acquisition of CNP's minority shareholdings.
• For smaller banks that operates in more narrow market or segment, with a less diverse franchise than larger peers, delivering on their strategy in building and diversifying their franchise, added value offerings, improving cost efficiency, and stronger consistent profitability could ultimately support the prospects for higher ratings.
• A build-up of ALAC buffers in excess of our base case could protect senior preferred creditors further, also in case of weakening SACPs. For BPCE, we could incorporate a second notch of ALAC support if its bail-inable debt level is sustainably above 6%.

What could move bank ratings down?

• As we have done in the past two years, we could consider rating actions on individual banks relative to their positioning against similarly rated peers. This could also happen if a bank did not cope with the challenge of adjusting their activities to the evolving interest-rate environment, leading to rapidly declining margins or weaker efficiency. Most banks will find efficiencies hard to seize faced with the battle to increase revenue and reduce costs amid high competition and a pressing need to digitalize. The deterioration of capital positions and our risk-adjusted capital trajectory failing align with our capital assessment could also prompt downgrades.

German Banks: High Economic Resilience, Robust Asset Quality, But Structural Profitability And Digitalization Challenges

Key takeaways

• The stable outlooks on most German banks largely benefit from banks' robust domestic asset quality and manageable risk costs. This reflects our expectation of ongoing well-cushioned German households, corporates, and public finances thanks to high resilience and recovery of the competitive German economy, low domestic indebtedness, and a historically strong external credit position. Similarly, despite a period of rising house prices, we consider a rapid correction unlikely in the medium term.
• We believe German banks face a bigger challenge in terms of managing industry risks. Low returns remain a stubborn problem for the German banking sector, which materially trails Northern and Eastern European banking industries. Structurally relatively weaker profitability from intense competition, generally low gross lending margins, and longer term unsupportive low interest rates impede German banks' abilities to cover their cost of capital or invest in developing sustainable business models supported by new technologies. Our expectation of relatively low credit losses and nonperforming loans in Germany, stable earnings in some segments, and restrained risk appetite in recent years of German banks somewhat offset our concerns.
• We believe the German banking industry needs to make further progress in reducing costs to generate buffers and to accelerate the digital transformation of business models to address increasing risks of tech disruption. Pressures are amplified by the accelerated trend towards digital banking, for which we view German banks as laggards. We believe with intensified digitalization efforts German banks could catch up, but international players--including big tech companies--with lower cost models add to price transparency and further weigh on gross margins.

What could move bank ratings up?

• The majority of bank ratings are currently well positioned, as the large number of stable outlooks indicate, not least because of the high economic resilience of the German economy.
• Upgrades are likely to depend on bank-specific factors, such as capital or profitability improvements above our expectations, material progress in digitalized banking services and cost efficiency to close the gap with international peers, and accelerated, tangible progress on some banks' necessary individual business restructurings.

What could move bank ratings down?

• German banks face diverse risks due to their heterogeneous profiles. That said, ratings could be hit by increasing risk of house price bubbles, if the trajectory of prices and credit growth depart from our medium-term forecast deceleration. Similarly, bank ratings could move down as a result of unexpected, material adverse international developments due to the German economy's high degree of openness to external shocks, particularly for some German banks with more confidence-sensitive funding, higher-than-average loan leverage, and more volatile business outside Germany.
• We could see downgrades if banks fail to progress in improving structural revenue diversification, cost bases, and digitalization to keep up with that of both peers and new competitors, and there is further widening of the German banking sector's digitalization gap with leading banking systems, such as in the Nordics.
• Some banks' outlooks are linked to successful individual restructuring or potential changes to their resolution strategy.

Icelandic Banks: Encouraging Signs, Though Recovery Risks Remain

Key takeaways

• Banks' loan underperformance remains elevated but this is likely to improve as tourism continues to recover. We expect a continued gradual reduction in loans that are frozen, well past due, or unlikely to be paid. As of Sept. 30, 2021, this was close to 9% of banking system lending, concentrated in services and tourism-dependent borrowers. Continuing recovery in tourism flows should ease the early-stage pandemic risk of widespread and abrupt corporate-sector adjustment, in our view. Consequently, our base case sees credit losses settling at about 30 basis points (bps) of gross loans in the coming two years, though downside risk to this forecast persists.
• Resilient profitability is likely to continue. Risk-adjusted earnings have been resilient through the pandemic and we expect further improvement. Margins are likely to rise in step with real rates, and leading efficiency should continue. After the one-off hit from the pandemic in 2020, we expect ROEs to recover to high single-digits in the coming two years. This is a level we consider high by international standards, particularly given Icelandic banks' very strong capitalization.
• Tighter macroprudential and monetary policy should contain any further build-up of imbalances. Household and total private sector leverage rose sharply during the pandemic. In our view, low borrowing costs encouraged a resilient and supported household sector to take on additional debt. Coincident with real property price growth of almost 10% in 2021, we believe this presents early signs of building systemic risk. That said, we consider the policy response has been proactive. The recent monetary policy tightening and additional macroprudential controls should limit the risk of a large and disorderly correction, in our view.

What could move bank ratings up?

• Sustainably lower non-bank participation in the mortgage market, persistently high risk-adjusted profitability, and durable tourism recovery could lead to upgrades. In this scenario, corporate-sector defaults are likely to be limited and underpin low bank credit losses, while housing correction risk is likely to diminish as household earnings rise in step with economic recovery.
• Effective resolution framework and sufficient loss-absorbing capacity could support higher ratings. Iceland is in the process of establishing its resolution regime and setting MREL requirements. In time, we could raise bank ratings if we see the resolution framework as effective and believe banks will maintain meaningful loss-absorbing buffers that lower default risk for senior preferred creditors.

What could move bank ratings down?

• A large and abrupt economic adjustment, likely due to disruption in the tourism recovery, could prompt downgrades. This scenario would likely be consistent with deteriorating underlying bank profitability, large balance sheet impairment, and a broader and significant economic slowdown. Higher risk of widespread corporate sector defaults and scarring could have knock-on effects for households' debt servicing capacity, raising the risk of a disorderly asset price correction.

Irish Banks: Profitability Challenges Remain Despite Economic Recovery And Exit Of Foreign Players

Key takeaways

• We forecast sound growth prospects for the underlying domestic Irish economy, supported by the end of COVID-19 restrictions. In particular, we project modified gross national income (a better measure of Ireland's national wealth and debt sustainability than GDP as it excludes activities with limited domestic links) growth at 4%-5% over the next two years, following an anticipated 5% growth in 2021.
• Despite this forecast growth, profitability challenges remain profound for the Irish banking sector. The pending departure of both Ulster Bank and KBC provide growth opportunities, primarily in the form of loan book acquisitions, but organic earnings growth remains challenging and substantive revenue diversification remains low. In addition, the banks continue to face persistent headwinds in the form of high capital requirements for mortgage loans and elevated cost bases, although the negative impact of both should be somewhat diluted if announced loan book acquisitions are completed. 
• Irish banks' balance sheets remain robust and the level of their nonperforming assets (NPAs) should be manageable. Actual losses over the last year were muted and banks have cautiously started to release some provisions on the back of improving macroeconomic forecasts. That said, banks are still holding on to a management overlay, given that pandemic-related risks persist and are not fully captured in existing models. We still expect to see some increase in NPAs as borrowers' cash flows remain under pressure and support measures are largely withdrawn. Nevertheless, the current level of provisions provide a sufficient buffer for potential losses, and we estimate impairment charges will normalize around 20-30 basis points (bps) over the next year.

What could move bank ratings up?

• We could revise our outlooks on our two largest Irish banks to stable from negative if operating conditions stabilize with tangible signs of the banks delivering on their cost-cutting, revenue diversification, and digital transformation plans while maintaining good capital buffers and asset quality.
• We could raise our ratings on Permanent TSB Group if its risk profile improves as we expect, with NPAs reducing to a level comparable to European peers.

What could move bank ratings down?

• The persistence of substantively low revenue diversification and suboptimal efficiency, despite committed cost discipline and investments in digitalization, will remain strong headwinds.
• Although not our base case scenario, downside could also come from unexpected deterioration of the banks' capital positions (mainly on the back of inorganic growth transactions or capital distribution higher than we currently envisage).

Italian Banks: Prolonged Economic Expansion Could Enhance Bank Creditworthiness

Key takeaways

• After operating for more than a decade in a weaker economic environment than many peers, Italian banks will likely benefit from Italy's projected sound economic expansion over the next two to three years. We forecast GDP growth of 4.7% in 2022, which would likely translate into low nonperforming exposures (NPEs) and credit losses (outside of the short-dated one-off effects of the pandemic, which we consider to be manageable).
• The impact of these positive developments on banks' performance and creditworthiness will continue to vary significantly. For some institutions, lower economic risks and higher sovereign creditworthiness would only cushion the impact of cyclical and structural or longer-term headwinds on the sustainability of their business models. For banks with stronger, more sustainable business models, these potential developments would remove the main constraints to our current ratings.

What could move bank ratings up?

• For UniCredit, the positive outlook reflects the possibility that we could raise the rating if we conclude that the bank's creditworthiness has improved and, even absent a sovereign upgrade, that it retains sufficient loss-absorption capacity to potentially survive the stress associated with a hypothetical sovereign default scenario.
• Our positive outlooks on other Italian banks and financial institutions primarily reflect the possibility that we could raise their ratings if we raised the rating on Italy and concluded that reducing economic risks had significantly strengthened their stand-alone creditworthiness.

What could move bank ratings down?

• The overall outlook for our bank ratings in Italy is positive (see chart above) and we do not consider downgrades as likely at present. That said, for banks that have a positive outlook linked to that on Italy, we would likely revert the outlook to stable if we were to take a similar action on the sovereign. In addition, we could revise the outlook to stable if we perceived that economic risks in Italy were not diminishing, most likely resulting in weaker asset quality metrics and capital buffers.
• We could lower the ratings on weaker players if, contrary to our expectations, economic and operating conditions deteriorate, potentially exposing them to the vulnerabilities we see in their business models.

Norwegian Banks: Balance Sheet Resilience And A Swift Return To Pre-Pandemic Profitability Levels

Key takeaways

• Extraordinary fiscal and monetary policy measures have supported the strong economic recovery in Norway. Bank profitability has returned to pre-pandemic levels, with a forecasted return on equity of 11% in 2021. The improved operating climate has led to significant reversals and a lower level of loan losses, which have ultimately supported the banking sector's bottom line. We expect asset quality to remain robust overall through 2022.
• With Norges Bank starting its rate hiking cycle in December 2021, net interest income growth will likely also support revenues over the course of 2022.
• Norwegian banks started the pandemic with capital levels well above regulatory requirements. In addition, regulatory measures--including dividend restrictions and a lower counter-cyclical buffer (CCyB) requirement--have boosted capital buffers despite continued loan growth. We don't expect Norges Bank's decision to increase the CCyB to 1.5% from 1.0% as of June 2022 to affect distribution plans as most banks incorporate full buffer rates in their capital planning.

What could move bank ratings up?

• Overall, we anticipate that Norwegian banks will post robust earnings, supported by their advanced digital platforms and formidable capital positions. As a result, the outlooks on Norwegian bank ratings are stable, reflecting our view that the ratings are unlikely to change over our two-year outlook horizon.
• Our stable outlook on DNB Bank reflects our view that the bank will generate a return on average common equity of 10%-12% over the coming two years, reinforcing its solid capital buffer. DNB's ongoing takeover attempt of digital retail player SBanken demonstrates that, despite its high level of digital preparedness, it will continue to focus on strengthening its online offering. We see a rating upgrade as remote given that the rating on the bank currently ranks among the highest for financial institutions globally.
• Sweden-based Nordax Bank AB concluded in November 2021 its acquisition of Bank Norwegian ASA (BBB-/Stable/A-3). An upgrade of the bank is unlikely at this stage and would hinge on the broader group's operating performance, the swift integration of Bank Norwegian, and overall creditworthiness.
• Improved profitability owing to stable, predictable revenue generation and resilient asset quality could lead to a positive rating action on Eiendomskreditt, although an upgrade is unlikely at present.

What could move bank ratings down?

• Although not our base-case scenario, we could consider negative rating actions if asset quality substantially weakened, stemming from a deterioration of the general operating climate in Norway. While banks' direct exposure to oil and gas extraction is declining--at less than 5% as of November 2021--CRE exposures account for around half of total corporate lending and we believe that pressure in the CRE sector could affect the broader Norwegian economy.
• Key risks in the Norwegian economy that could affect bank ratings are high household debt, combined with increasing residential and commercial property prices, as well as climate change and the transition to a low-emission society that will require a restructuring of the Norwegian economy in future.

Portuguese Banks: Still-High Loan Loss Provisions And Potential Asset Quality Problems Set The Tone

Key takeaways

• Growth expectations for Portugal remain positive, given the generous EU transfers--over 30% of GDP in 2021-2026 via the Recovery Plan for Europe and the EU budget. We project average GDP growth of 5.7% this year, following an anticipated 4.7% growth in 2021.
• Foreign demand will remain a key driver of the housing market. We anticipate that tourism and foreign buyers will continue to push up nominal house prices in Portugal by 5.0% this year, compared with an estimated 4.9% growth in 2021.
• Asset quality deterioration will become more evident in 2022, following the expiry through 2021 of widely used moratoriums. Problem loans at a system level continued to decline during the first half of 2021, but loans under moratorium have already showed some signs of deterioration. We anticipate the domestic cost of risk will remain above that of peers in 2022, at around 90 bps. Significant heterogeneity among the largest players will persist, though.
• Still-high credit losses and revenue pressure will continue to constrain banks' profitability prospects, with domestic ROE likely hovering between 3%-4% this year. Positively, we see Portuguese banks' funding profiles becoming less risky, owing to significant deleveraging over the past decade and limited loan growth prospects.

What could move bank ratings up?

• An upgrade of Portugal could translate into an upgrade of some foreign-owned Portuguese banks, namely Banco Santander Totta and Banco BPI. Given these banks' strategic importance to their parents, they could be eligible for a higher degree of parental support if the rating on Portugal were higher.
• An upgrade could also occur if Portuguese banks' asset quality indicators moved toward European peer levels, with limited materialization of new problematic assets and an improvement in the system's legacy loan book. Better-than-anticipated domestic profitability could also lead to an upgrade.

What could move bank ratings down?

• A downgrade of Portugal could cause the ratings on Banco Santander Totta and Banco BPI to move in the same direction. In addition, the ratings could come under pressure if certain foreign parents' commitment to their subsidiaries faltered.
• Eroding capitalization, due to worse-than-expected litigation risks in Poland, material losses, or overly aggressive growth, could lead to a downgrade of Banco Comercial Portugues and Haitong Bank, respectively.

Spanish Banks: Fee Income And Cost Cutting Are Key Focal Points For 2022

Key takeaways

• Most Spanish banks carry a stable outlook, reflecting limited remaining downside risk from the pandemic shock. The outlook on Santander, Santander Consumer Finance, and BBVA is negative, however, mirroring that on the Spanish sovereign.
• While asset quality problems from the pandemic have yet to emerge, the substantial support from the government guarantee scheme, coupled with the economic rebound underway (real GDP growth is expected at 7% in 2022), should help banks keep credit costs and capital under control. We forecast credit losses for 2022 at 50 basis points, very much in line with those of 2021.
• Bottom-line profitability will improve only mildly, remaining below pre-pandemic levels for most banks. Banks will deliver on fee income and cost control and could generate significant cost synergies if consolidation continues. However, as long as rates remain negative and prospects for lending growth are muted, we see limited upside for net interest income.

What could move bank ratings up?

• Acquisitions by stronger entities could boost the creditworthiness of weaker players.
• Progress in building up buffers of bail-inable debt could benefit the ratings on systemically important institutions, particularly Sabadell (the only systemically important bank yet to benefit from ALAC uplift). In addition, for banks that have sizable buffers of bail-inable debt, but whose main resolution strategy is "sale of business", the ratings could benefit from resolution authorities' further assurance on the degree of protection envisaged for senior creditors in resolution.
• A successful transformation of the business, making it more profitable and resilient to technological disruption.

What could move bank ratings down?

• A downgrade of the Spanish sovereign credit rating could result in lower ratings on Santander, Santander Consumer Finance, and BBVA, given the substantial impact of a hypothetical sovereign default scenario.
• Acquisitions that add leverage, higher risks, or integration challenges could pressure the ratings on the acquirer.
• An abrupt reversal of the current supportive monetary conditions could hinder the capacity of private sector players to pay their obligations and limit their access to funding, in turn impeding banks' asset quality and profitability.

Swedish Banks: Earnings Performance Reflects Banks' Adaptability

Key takeaways

• Digital preparedness and policy measures have kept the Swedish economy and banking sector intact in the wake of the COVID-19 pandemic, with profitability in 2021 rebounding to pre-pandemic levels. Online channels have gained further importance and will clearly determine how banks liaise with their customers going forward. Similarly, for most banks, internal IT projects will continue to dominate the cost narrative over the next two years.
• We expect the strong pace of price growth in the Swedish housing market to ease as policy measures and restrictions are lifted. However, asset quality may also show signs of deterioration as support for certain sectors is withdrawn. While policy actions are likely to be reversed in a systematic fashion, household debt levels have grown, increasing banks' sensitivity to shifts in economic conditions and interest rates.
• We don't expect the announced increases in capital requirements related to the countercyclical buffer to affect banks given their well-capitalized positions. Thanks to ample capital buffers, acquisitions and consolidations could pick up if banks identify complimentary opportunities.

What could move bank ratings up?

• The stable outlook on a large player such as Svenska Handelsbanken reflects our view that ratings upside is remote, given that its ratings are already among the highest for financial institutions globally. Overall, we consider that the stable outlooks on Swedish banks reflect ratings that we believe are well-positioned (see chart above).
• Ongoing work to address governance deficiencies may, over time, lead to improved frameworks and could therefore enhance our view on Swedbank, for example.
• Progress to build up additional loss-absorbing capacity (ALAC) through senior nonpreferred issuance is underway for large and midsize banks and we expect this to continue to underpin the stable outlook on most banks. We do not expect the policy changes relating to banks' minimum requirement for own funds and eligible liabilities, and likely lower issuance volumes, to affect our views on systemic banks' ALAC.

What could move bank ratings down?

• With inflation set to pick up, interest rates could increase more quickly than previously anticipated. In addition, a weaker operating environment could impinge on our assessment of the Swedish BICRA and impact the starting point, or anchor, for our bank ratings. Household indebtedness remains a major source of risk, in our view.
• Risks related to governance and conduct investigations still linger; if not resolved, these could also weigh on our assessment of those banks that are struggling to resolve outstanding issues.

Swiss Banks: Proven Exceptional Resilience

Key takeaways

• The Swiss banking sector is highly capitalized, deposit-rich, and conservatively regulated. We think Swiss banks are well equipped technologically and able to meet customer expectations. We consider barriers of entry for new players in Switzerland as higher than in neighboring countries.
• Many rated Swiss banks benefit from guarantees and strong ties with their public owners, which we think implies they would receive extraordinary support in times of stress if needed.
• Domestic banks' asset quality has been very resilient through the pandemic and profitability remained solid despite ongoing margin compression in a low-rate environment. Banks can earn their costs of capital without compromising risk standards.
• Credit risk in customer portfolios is very low, reflecting the dominance of well-collateralized mortgage loans, Switzerland having one of the wealthiest household sectors globally, and the corporate sector's track record of resilience in a crisis.

What could move bank ratings up?

• Swiss bank ratings are already high, but a sustainable stabilization in residential house price growth and significant reduction in affordability risks in the sector could benefit individual bank ratings. Ongoing strong resilience through the pandemic and outperformance of peers would be preconditions to positive rating actions.
• Upgrades are possible for individual banks on a positive outlook if we were to upgrade the canton owners.
• We could revise the outlook on Credit Suisse back to stable in the event of swift remediation of identified weaknesses in risk management and major legal suits and regulatory investigations conclude without material financial or reputational damage to the bank, alongside the bank closing the gap with peers in terms of its risk return profile.

What could move bank ratings down?

• Plans to remove explicit cantonal or state guarantees could loosen individual banks' ties with their public owners and lower the likelihood of banks receiving extraordinary support in times of stress. This could result in us lowering the ratings on impacted banks by multiple notches.
• An increase in financial crime cases linked to Swiss banks could lead us to question market discipline, franchise stability, and our view of regulatory effectiveness. We consider strong anti-money-laundering standards and business models and practices that do not rely on customers' undeclared wealth as crucial for the stability and strength of the Swiss banking sector.

U.K. Banks: Solid Capital, Normalised Provisioning, And Rising Rates Will Support Ratings In 2022

Key takeaways

• U.K. banks have entered 2022 with strong regulatory capital buffers, historically low levels of nonperforming assets, robust provision coverage, and an increasingly supportive interest rate environment.
• The improving performance outlook for the sector should see resilient bank earnings, so supporting ratings, and potentially allowing for idiosyncratic upgrades in the sector.
• An uneven economic environment is likely to persist through early 2022, however, and pockets of credit risk may arise in this context, adding pressure to ratings amid continued sector restructuring.

What could move bank ratings up?

• Capital levels are strong and resilient in the U.K. system on both a regulatory and S&P Global Ratings risk-adjusted basis. While we would expect excess capital under both measures to see some attrition from shareholder distributions and a return to growth in higher risk-weighted corners of the loan book, we expect robust capital to remain a feature of the sector in 2022.
• Stronger earnings could also bolster banks' capital position. With a widening in interest rates across the curve, yields should improve for bank assets, even as competition continues to weigh on certain corners of the market (most notably prime mortgages, though margins are recovering through early 2022 in this market). Taken alongside a solid base for our assessment of capitalization, good earnings performance and organic capital generation could put upward pressure on our view of capitalization in the system.
• At present, the positive outlook on Barclays Plc is the only one in the U.K. system, and reflects our view that Barclays is delivering a stronger, more consistent business profile and financial performance, underpinned by a stable and effective strategy. Looking beyond Barclays, successful strategy execution and effective franchise management will be essential traits to any upside in U.K. bank ratings.

What could move bank ratings down?

• Against an uneven backdrop entering 2022, rated banks will continue to implement ambitious cost-saving programs, and weak execution remains a prominent sector risk.
• The U.K. economy remains on an uneven footing with strong price inflation and the Omicron COVID-19 variant slowly waning. If economic pressures precipitate material pockets of risk beyond our base case, and banks struggle under the weight of their ambitious restructurings, downside risk could become more prominent in the sector.

Related Research

• Macroeconomic Update, Jan. 20, 2022
• Bulletin: German Banks Are In A Good Position To Absorb BaFin's Moderate Increase In Macroprudential Capital Buffers, Jan. 20, 2022
• Global Banks Outlook 2022: Back On Course, Dec. 14, 2021
• European Economic Snapshots, Dec. 6, 2021
• Global Credit Outlook 2022: Aftershocks, Future Shocks, and Transitions, Dec. 1, 2021
• EMEA Financial Institutions Monitor 4Q2021: Rebounding Economies Bolster Banks’ Recovery, Nov. 5, 2021
• European Housing Market Inflation Is Here To Stay, Nov. 2, 2021
• Basel III Bank Capital Rules In Europe: Delayed And Diluted, Oct. 28, 2021
• The Resolution Story For Europe's Banks: More Resolvability, Consistency, Credibility, Oct. 5, 2021
• Top 100 Banks: Capital Ratios Show Resilience To The Pandemic, Sept. 28, 2021
• The Fear Of Greenwashing May Be Greater Than The Reality Across The Global Financial Markets, Aug. 23, 2021
• 2021 EU Bank Stress Test: More Demanding, Better Resilience, Aug. 2, 2021
• Climate Risk Vulnerability: Europe’s Regulators Turn Up The Heat On Financial Institutions, Aug. 2, 2021
• A Little More Clarity, A Little Less Gloom: An Update On Our Bank Credit Loss Forecasts, July 15, 2021
• Green Liquidity Moves Mainstream, July 8, 2021
• As Near-Term Risks Ease, The Relentless Profitability Battle Lingers For European Banks, June 24, 2021
• Diverse Rating Actions On European Banks Highlight The Importance Of Robust Business Models To Long-Term Resilience, Feb. 26, 2021

Annex

Table 2

Annex: Rating Actions On Top 100 European Banks During Fourth Quarter 2021
FI Methodology Update	Other Actions
Opco ICRs raised due to increased ALAC uplift	ICRs raised on improved profitability
Allied Irish Banks plc	Banque Cantonale de Geneve
Banco Santander SA	Deutsche Bank AG
Belfius SA/NV	Nationwide Building Society
BBVA SA	ICR outlook to positive
Caixabank SA	Bank of Cyprus
Credit Mutuel	Intesa Sanpaolo SpA
Erste Group Bank AG	Mediobanca SpA
Opco ICRs raised due to removal of negative ICR-adjustment notch	UniCredit SpA
Danske Bank AS	PTSB Group plc
Standard Chartered Bank	ICR outlook to stable from negative
	FCE Bank plc
	Iccrea
	ICR lowered
	Bank Norwegian ASA
Note: Various subsidiaries of the groups above similarly benefited from an upgrade of the parent. ALAC--Additional loss-absorbing capacity. ICR--Issuer credit rating.

Primary Credit Analyst:	Giles Edwards, London + 44 20 7176 7014; giles.edwards@spglobal.com
Secondary Contacts:	Elena Iparraguirre, Madrid + 34 91 389 6963; elena.iparraguirre@spglobal.com
	Osman Sattar, FCA, London + 44 20 7176 7198; osman.sattar@spglobal.com
	Nicolas Charnay, Frankfurt; nicolas.charnay@spglobal.com
	Claudio Hantzsche, Frankfurt + 49 693 399 9188; claudio.hantzsche@spglobal.com