15th January 2021

European banks’ outlook remains challenging in 2021 says DBRS Morningstar
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DBRS Morningstar has released a commentary discussing the outlook for European banks in 2021.
Key highlights include:
-DBRS Morningstar expects European banks to continue to face revenue pressure in 2021, following on from a challenging year in 2020.
-Given the tough revenue environment with the COVID-19 pandemic and low returns, it remains key for European banks to reduce operating costs further. However, given the need to continue to invest in technology, as well as regulatory and compliance requirements, this will be difficult for banks.
-DBRS Morningstar views the pressure to improve returns is likely to lead to further domestic consolidation in some countries(particularly Italy and Spain).
-A significant increase in Non-Performing Loans(NPLs) is highly likely in 2021 as government support comes to an end, with the NPL trajectory remaining a function of the length of economic restrictions, overall economic impact, as well as any additional support measures.
-Ample liquidity will continue in 2021, however, DBRS Morningstar views the recent increase in the deposit base as unlikely to be a permanent shift in banks’ funding mix.
-DBRS Morningstar expects the deterioration of asset quality to trigger an increase in risk-weighted assets affecting capitalisation levels, albeit from solid bases. In addition, internal capital generation could weaken given lower earnings and the resumption of dividend payments.

“We anticipate the revenue pressure banks faced in 2020 to continue in 2021. In a still very challenging environment, optimising operating costs remain key, and we view the pressure to improve returns is likely to lead to further domestic consolidation in some countries. Furthermore, a significant increase in NPLs is highly likely when government support ends. This will affect risk-weighted assets, meanwhile internal capital generation could weaken due to lower earnings and the resumption of dividend payments.” said Vitaline Yeterian, Senior Vice President,

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