German banks could be next hit by debt crisis

FRANKFURT – Credit rating agency Standard & Poor’s warned a widening of the European debt crisis could have severe consequences for German banks.

“The refinancing base of large German banks is sensitive, and a potential loss of confidence in the case of a widening of the crisis could create the need for support, as it did after Lehman,” Stefan Best, senior director for financial institutions ratings at S&P, told Reuters in written answers to questions.
Rival agency Moody’s earlier on Wednesday cut the credit ratings of French banks Societe Generale and Credit Agricole because of their exposure to Greece’s debt.

Asked if German banks might face a credit rating downgrade due to the debt crisis, Mr. Best said: “That depends on the extent of the crisis.

“A Greek default on its own would very likely be digestible for the banks, even without state support, as long as a further widening of the crisis can be avoided.”

Earnings prospects for German banks seemed “rather negative” but not threatening, as long as the crisis remained contained and there was no renewed recession in Germany, Mr. Best added.

Germany’s lenders have cut exposure to Greece to below 10 billion euros (US$13.7-billion), banking analysts estimate, with Commerzbank’s exposure now 2.2 billion and Deutsche Bank’s at 1.2 billion.

Both German and French banks had significant exposure in European periphery states, in Mr. Best’s view.

Deutsche Bank’s net exposure to Greece, Ireland, Italy, Portugal and Spain amounted to 3.7 billion euros at the end of June.

Although big French banks tend to have a better business mix than German counterparts, he added, market participants appeared to have greater confidence in Germany and its economic strength.

Deutsche Bank had a core Tier 1 ratio of 10.2% and liquidity reserves in excess of 150 billion euros, at the end of June, a presentation by the bank shows.

Deutsche Bank had completed 85% of its funding needs for the year as of August 31, the presentation stated.

© Thomson Reuters 2011

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