Ailing banks may lose government backing

Struggling European countries may end their support for banks they view as having no systemic importance, warned a Fitch Ratings analyst at the agency’s 2010 credit outlook conference in London on January 19.

“We’re becoming increasingly concerned that weaker governments may differentiate to a greater extent between those institutions they wish to support, and those private commercial banks they don’t believe are systemically important,” said Julia Peach, Fitch’s head of Europe, the Middle East and Africa (EMEA) banking group.

Spain, Ireland and Greece were cited as countries whose poor growth prospects made this a potential issue. Fitch forecasts negative real GDP growth for 2010 of –0.6% in Spain, –1.0% in Ireland and –0.3% in Greece. In contrast, 1.6% growth is predicted for Germany and 1.5% for France.

According to Peach, government intervention remains important for banks in difficulty as support from their parent groups is by no means a certainty. “If parents are not financially strong, or are themselves receiving support from domestic governments, then support may not be forthcoming,” she said.

Peach highlighted the recent case of Hypo Group Alpe Adria (HGAA), which was saved from collapse in December by the Austrian government after its parent company, Bayerische Landesbank (BayernLB), was unable to offer further aid. BayernLB chose to write off its waived claims and 67% stake in HGAA after the Austrian bank predicted a loss of over €1 billion for 2009, considerably higher than had been forecasted.

Without government support, Peach believes second and third tier names could experience difficulties, while “top-tier names have been able to fund themselves independently over the past several months”.

When the crisis reached its nadir in late 2008, many governments stepped in with various programmes to support banks, including guaranteeing bonds issued by them. However, those guarantee schemes are gradually being phased out, which could pose a serious problem for weaker banks.

France’s debt guarantee programme expired for new issuance by financials at the end of last year, while those of Denmark, Germany, Ireland, the Netherlands and Spain will all terminate by the end of 2010. Only 31% of bank issuance in EMEA was guaranteed at the close of 2009, in comparison with 82% a year previously, said Peach.

And with €2.2 trillion of EMEA bank debt set to mature between now and December 2012, Peach said banks would need to compete aggressively for limited retail funds, as well as reduce loan volumes and extend the maturities of their capital structures.

“Investors are likely to differentiate increasingly between strong and weak institutions. The weaker names are likely to be heavily penalised on funding costs,” said Peach. “Safety nets will be in place to break the fall of the weakest banks, but they may not be as strong as they once were.”