Of the four countries featured in the report published by Moody’s, the ratings agency predicts the second highest economic growth in Spain (+1.2%) after Ireland (+2.8%). Portugal will also grow this year at 1% and Italy is likely to remain in recession in 2014 with a GDP contraction of 0.1 %.
Therefore, Moody’s thinks that the comparatively higher economic growth in Ireland “ought to offer some boost to these banks’ bottom line and improve the performance of asset portfolios via rising borrower debt-service capability.” Regarding the Spanish banks, the ratings agency also supports that they “should perform better over this period as problem loan formation slows and credit costs ease. In Italy, where economic growth is more sluggish, as well as in Portugal, banks’ internal capital generation is likely to remain more subdued for a longer period of time.”
Comparing the different levels in terms of credit fundamentals (efficiency, asset quality, capital, liquidity and net profits), the recovery trajectories of these four banking systems will be different. For example, Moody’s highlights that “home-grown real-estate bubbles in Ireland and Spain meant that asset-quality deterioration was far more pronounced in these banking systems. In both cases, the banks had to be recapitalised using taxpayer funds and the bail-in of junior creditors, in addition to private means in Spain.” Meanwhile, “the Italian system did not suffer the same degree of asset-quality erosion or the need for tax-payer and creditor-funded recapitalisations; and in Portugal, banking recapitalisation followed the EBA’s stress test and was funded using public-sector funds and private resources.”