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Banking sector will see ‘relative’ stability in 2013, Moody’s says


Ratings agency also warns European banks may need additional capital

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Global market turmoil coupled with Eurozone sovereign crises took a heavy toll on many banks' credit profiles resulting in a substantial number of downgrades in 2012, but bank ratings are expected to be ‘relatively stable’ during 2013, Moody’s said on Thursday.

However, in its report – Global Banking Outlook 2013 – it cautioned that ratings pressure would persist for the year ahead despite the relative stability.

"While there has been strengthening in many banks' financial performance, there are a number of interconnected themes with material implications for bank credit that we will closely follow in 2013," said Greg Bauer, global banking managing director at Moody’s.

In particular, the ratings agency remained concerned about a fragile global recovery and the ‘still-elevated sovereign risk’ for many European banking systems. Moody’s also said unprecedented low interest rates could dampen banks’ profitability and encourage excessive risk-taking.

Even though banks in many European jurisdictions have raised billions to cover potential losses from bad loans, Moody’s said more capital funding may yet be required. Once again, governments may have to step in with taxpayers footing bulk of the funding, it added.

"We believe that many banks, in particular in Spain, Italy, Ireland, and the UK, require material amounts of additional provisions to fully clean up their balance sheets," Bauer said.

"Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans. This strategy of buying time, often tolerated by regulators, limits a bank's capacity for new lending and poses risks for creditors of European banks," he added.

However, the agency did not clarify how much extra capital banks would need.

The UK Financial Services Authority (FSA) is currently reviewing how British banks weigh the risk of bad loans. The said institutions will be notified by March if they need to bolster their capital reserves. However, the results of the FSA review will not be made public.

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Banking sector will see ‘relative’ stability in 2013, Moody’s says
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