Further subprime impact limited: Fitch

Fitch Ratings expects minimal further rating impact on European banks relating to US subprime exposures.

Negative rating actions are possible should the performance of other asset classes deteriorate beyond the expectations of a normal economic downturn, according to analysts speaking at Fitch's Annual Global Banking Conferences in Europe.

However, Fitch expects challenges ahead for European banks, as western European economies slow and domestic banking systems face funding challenges, slowing profitability, strained capitalisation and declining asset quality.

Julia Peach, managing director and head of Fitch's European Financial Institutions, said: "Although banks have already reported a significant percentage of their expected losses on subprime exposures, the deleveraging process currently underway in European banks is likely to act as a drag on profitability and asset quality. A number of banks are already in the process of strengthening capital ratios."

“Although banks have already reported a significant percentage of their expected losses on subprime exposures, the deleveraging process currently underway in European banks is likely to act as a drag on profitability and asset quality.

Julia Peach, managing director and head of Fitch's European Financial Institutions

Fitch believes that banking systems in the UK, Ireland, Germany and Iceland may face the greatest headwinds over the next 12-18 months.

US financial institutions are facing an extremely challenging environment, according to the rating agency. The outlook for both US banks and securities firms remains negative, as financial results at many banks will exhibit increasing stress from fundamental credit quality deterioration.

However, with investors clearly willing to invest in banks with solid core franchises and bankers willing to take the appropriate steps to preserve and fortify their capital positions, most US banks are reasonably well positioned to manage this period of severe credit stress.