Fitch revises CEE banking sector outlooks to negative over COVID-19 pandemic

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Fitch Ratings said on Monday that it has revised to negative its outlook of the banking sector for the markets it covers in the region of Central and Eastern Europe (CEE), including Bulgaria, Croatia, Romania and Slovenia, due to the coronavirus disease (COVID-19) pandemic.
The economic pressures resulting from the spread of the coronavirus are credit negative for CEE banks and could lead to negative rating actions, Fitch said in a statement, adding that whether this pressure translates into negative rating actions will depend in part on the availability of support from parent banks.
Lower interest rates and, in some jurisdictions, exchange rate volatility will also contribute to the weakening of lenders’ profitability, Fitch added.
“The degree of pressure on banks will depend on the extent and duration of economic slowdowns, the structures of national economies, movements in exchange rates and interest rates, policy responses, and individual banks’ business profiles, risk exposures and financial metrics before the pandemic,” the ratings agency noted.
Corporate asset quality will weaken across the region due to the sharp drop-off in economic activity, Fitch also said.
Small and medium-sized enterprises (SMEs) and micro-companies are generally most vulnerable given limited financial flexibility to absorb revenue and liquidity pressures.
Economic pressure will also disrupt banks’ progress in resolving legacy asset quality problems where these are still significant, particularly in Bulgaria, Fitch said.
Banks’ profitability will weaken due to a slowdown in new lending, higher risk costs and margin pressure from interest rate cuts in some markets, such as Romania, but low or negative loan growth will help to offset pressure on solvency. According to Fitch, liquidity is unlikely to come under pressure as buffers are substantial, with funding mostly from customer deposits, and emergency funding support facilities are available from central banks. However, banking sectors in economies more dependent on cash payments, like Bulgaria and Romania, could see larger deposit outflows, Fitch also said.

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