Ratings firm adds to misery for banks amid 'unprecedented' Covid-19 crisis

Ratings firm Fitch has added to the misery facing lenders amid the "unprecedented" Covid-19 economic crisis, suggesting it will likely downgrade a large number of western European banks this year.

The ratings firm cited the economic fallout from the crisis and the economic contraction squeezing the banks across western Europe means "over 95% of the western European bank ratings reviewed have negative outlooks or were placed on rating watch negative" in recent weeks.

It said that governments and central banks across the continent have acted to support their economies but that the costs will be substantial.

"Governments and regulators have taken unprecedented steps to support the corporate and household sectors to mitigate the damage from the crisis," the ratings firm said.

"Measures to ensure that banks continue to act as a conduit for providing liquidity to the real economy are supportive of banks’ viability, but their effectiveness will depend on how quickly they are implemented, on how long the crisis lasts and on what form the recovery will take," Fitch said.

However Fitch does not believe these measures will fully mitigate the impact.

It said it has already downgraded 10 banks, put the outlook for 57 lenders on negative and a further 38 banks on rating watch negative (RWN).

Its rating watch negative suggests "a bank entered the crisis from a position of weakness" or is facing a particular exposure.

It said a negative outlook can be over a "one-to-two-year time horizon".

"The nature and severity of the current crisis is unprecedented and clearly beyond any traditional or even stressed business cycle," it said.

This means that there is a heightened likelihood of downgrades, as signalled by the high number of negative outlooks and RWNs.

The shares of Irish banks have like many European lenders fallen sharply since the onset of the health and economic crisis. AIB shares and Bank of Ireland have fallen sharply in the past four weeks and are down by up to 78% from  year ago.