Bond landscape: European banks, USD and SGD bonds

WE expect the eurozone economy to weaken and enter into a recession in 2023, with lower economic activity and higher prices hurting European banks’ asset quality. Non-performing loans have stayed fairly resilient but the European banks have yet to fully provision against higher credit risk in their loans. We expect default rates to rise in 2023 as economic activities contract further and loan-loss provisions increase.

Thankfully, net interest margins due to higher global interest rates are expected to continue to support bank earnings this year. On the other hand, the majority of the losses are expected to come from investment banking and higher provisions for loan loss.

With the median Common Equity Tier 1 (“CET1”) ratio for European banks reaching 14.74 per cent, the banks remain well-capitalised currently. CET1 ratio had previously dropped from 2021 (Figure 1) with higher credit risk-weight assets (“RWA”). But it still saw overall growth compared to the previous years as banks continue to ensure they are well-capitalised after the 2008 Global Financial Crisis. As of 3Q22, European banks maintain a significant buffer over their regulatory CET1 requirements.