A Look at European Banking, Retail, Telecom and Media Sectors

In Europe’s rated banking sector, higher regulatory and restructuring costs have cut into savings achieved from large-scale branch and employee head count reductions, according to a new Moody’s Investors Service report.

"European banks are facing continued revenue erosion and we expect the sector to remain under pressure to find cost savings," said Nick Hill, a managing director at Moody's Investors Service. "So far, however, head count and branch reductions have not led to significant economies."

Rated European banks have cut branches by 18% since 2010, while total costs grew at a compound annual rate of 1.2% from 2010 to 2016. Higher administrative expenses, likely due to additional regulatory costs and higher legal, compliance and outsourcing costs are the primary culprit, Moody’s said. Meanwhile, profitability at European and U.K. banks has fallen since the financial crisis as return and tangible equity has measured in the single digits since 2007.

“The challenge of reducing costs is unlikely to diminish for European banks, despite the region's economic recovery, as interest margin pressures continue,” Moody’s said. “The pace of consolidation has accelerated, but the relationship between scale and efficiency is low, suggesting that banks will need to look internally to achieve further savings.”

European Retail
The retail sector’s prospects look bright in Europe thanks to overall revenue and earnings growth into 2018, Moody’s said in a separate report. "A rosier economic outlook for the majority of countries in Europe will offset fierce competition in many segments of the region's retail sector, underpinning median revenue and earnings growth of 3.0% and 4.1%, respectively, and supporting the stable outlook on the sector into 2018," said Vincent Gusdorf, vice president and senior analyst at Moody's.

At 3.1% for 2018, retailers’ growth prospects in the U.K. are not as strong as they are for those on the continent, mainly due to the effects of Brexit, Moody’s said.

Telecom and Media
Increased competition is likely to hamper growth for firms in the telecommunications and media sectors, especially for cable operators, Moody’s said in another report. Still, the above-average quality of the CLO-held issuers in the sector will help to offset this drag, analysts said.

"Debt issuers in the telecommunication and media, broadcast and subscription industries sector have better credit quality than the average CLO-held issuer in European CLO 2.0s we rate," says Javier Hevia Portocarrero, vice president and senior credit officer at Moody's. "Our 12-month default forecast is 0.7% for the combined European TMBS sectors, compared with 1.3% for all speculative-grade issuers, and our outlooks for the sectors are stable."

– Nicholas Stern, managing editor

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