Fitch: Economic Recovery Drives Major Benelux Banks' Stable Outlook
Most banks' operations are largely domestic and should benefit from accelerating economic growth in the Netherlands and Belgium, and robust growth in Luxembourg. This will support asset quality metrics and result in low loan impairment charges.
Established local franchises, combined with concentrated banking systems, drive revenue generation, but margins will remain under pressure from low interest rates. Belgian banks are likely to report lower net interest margins in 2016, following a recent wave of mortgage refinancing and due to their now limited ability to further reduce deposit rates. In the Netherlands, Fitch expects net interest margins to remain broadly flat, due to limited room for further funding cost reduction.
Risk-weighted capitalisation of the major Benelux banks is solid. While leverage is comfortable for most Belgian banks, Dutch banks have somewhat tighter leverage due to low average risk weights. Fitch expects these banks to be able to meet shortfalls to the likely future minimum of 4% through internal capital generation and continued hybrid issuance. We believe that evolving regulation will not have a significant impact on banks' capitalisation in 2016. Dutch banks would be sensitive to rules around mortgage risk weight harmonisation, due to low risk weights and high loan-to-value ratios in their mortgage loan books.
The sector outlook is sensitive to an economic downturn or a setback in the Dutch economic recovery. Negative rating pressure could arise from deterioration in banks' earnings generation, and less prudent liquidity and capital management. Rating upgrades would be contingent on solid internal capital generation and a structural improvement in profitability.
The full report, '2016 Outlook: Major Benelux Banks', is available at www.fitchratings.com or by clicking on the link above.
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