S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to S&P Global Ratings European Banking Insights webinar. Thank you for joining us today. My name is Osman Sattar. I'm a Director in the European Financial Institutions team, and I will be moderating today's webinar. If we move to the next slide, which shows the agenda, you can see that today, we'll be focusing on European Bank Liquidity and Profitability, reflecting on the ratings landscape for European banks. The key trends and takeaways from European banks results and how we see their performance during 2024. A quick overview of the European macroeconomic landscape and then some detail on how the ECB plans to change its operational framework and the implications that will have for European banks access to liquidity from the Central Bank. So for this, we have online our European sector lead, Giles Edwards and Nicolas Charnay and our European Chief Economist, Sylvain Broyer, to talk us through these topics as well as address your questions. Now as usual, our aim is to keep the presentation part to around 30 minutes or so, so that we can allow plenty of time for your questions as well. And in the interest of time, I'm not going to introduce each of our speakers individually today, but their bios are available to you on the webinar console. If we move to the housekeeping slide, I'll briefly go through a few notes on this as shown on your screen now. You can submit questions at any time during the webinar via that Q&A box located on the left-hand side of your screen. If there's questions that we can't cover on today's call, we will try and ensure that one of us or other relevant colleagues get back to you over the coming days. Also on the left, you'll see a resource bar you can download a copy of today's presentation slides along with the research we've published on today's topic. And as I mentioned earlier, to know more about our speakers, you can review their bios via that speaker bio rigid on the right-hand side of the screen. So with that, let me hand over to Giles to kick us off. Giles, over to you.

Great. Thank you, Osman. Yes. So a bit of theme setting first. Firstly, [where are we] with ratings. A quick rattle through. So the next slide, we'll start with the BICRAs that's our Banking Industry Country Risk Assessment, starting point for our ratings on any banks. Chart on the left regular viewers that reserve will have, will be familiar with. Essentially, the riskier is the top right-hand corner, the least risky bottom left-hand corner, and this blends economic risks faced by banks and industry risks faced by banks. What we've seen over the last 18 months and indeed continues to be the case is essentially a gradual drift of particularly peripheral European countries moving towards that bottom left-hand corner. And that is a trend that continues, albeit it is maybe starting to run its course, but there are still a number of positive trends visible with those blue lines. [indiscernible] some number of positive trends in that space. So clear positivity yet to come. On the next slide, rating bias, it's a very sort of steady picture really since hold through last year as well. where we still have, on the left-hand side, this is our sort of top 100 European banks. There is a, essentially broadly neutral bias, some negatives, some positives, lots of stable outlooks. Where we are talking about positive outlook, it really tends to be in that sort of BBB, BB area, by and large. And with one or two negatives around for various reasons, tend to be idiosyncratic we'll come back to that. And in a broader context, Europe is on that right-hand chart, plus 7%. This is actually all European banks here. So plus 7% is still very sort of middle of the road in a sort of cross-regional context as well in terms of sentiment. Next slide shows rating actions in the last weeks. We haven't really taken that many actually since through reporting season, and we'll come back to that about why? But there have been some not really for a variety of reasons. So there are some there on couple of Portuguese banks, BCP and [indiscernible] ofcouse this is linked to the sovereign upgrade, BCP more around the improvement in economic risk potentially in Portugal. [indiscernible] costs linked to the sovereign upgrade. BCP more around the improvement in economic risk potentially in Portugal. Sabadell is a classic case we had a number of these banks over the last couple of years of banks going away -- going through quite a significant restructuring to improve their operating efficiency and also the customer proposition to a degree. And now seeing the benefits of that. So it's essentially a structural uplift to profitability as well as the sort of obvious cyclical benefit that a lot of banks are seeing. Iccrea in Italy is it's typical in that sometimes banks capital does move the dial for us. I think, by and large, though, it's relatively rare these days. Most banks have pretty much topped out on capital and ongoing concern capital. And maybe it's really only the neutrals you can't distribute capital as easily in a low-growth environment where ratios still go up. But nonetheless, where it happens, we will recognize it. Handelsbanken ‘and we get a lot of investor questions around commercial real estate, not least Swedish [indiscernible] commercial real estate. The Handelsbanken ‘ is sort of front and center in sort of the Swedish CRE story. In effect, we are saying that, yes, this is a risk, but in Sweden generally, but overall, performance of the bank. Firstly, those portfolios seems to be holding up reasonably well and also the strength of the bank generally is still pretty impressive and therefore, no reason to think about negative outlook at this point. Downgrades, one local downgrade on Deutsche Pfandbriefbank downgraded them a couple of times now in the last 6 months or so, and that's a very narrow CRE story, particularly linked to the U.S., but not entirely. Next slide, talk about some of the non-stable outlook. So why are banks on positive why banks on negative? It's a bunch of different reasons, lots of different boxes. Some of that's bank-specific going concern, let's say, intrinsic stores in blue boxes, some of it has to do with various support aspects in the gold. I won't go too much into it, but I think when we talked about sort of earlier, improving banks and peripheral systems. We've got a [Greece] banks on positive outlook or atleast most of them on the positive outlook. Linked to combination profitability and completing the asset quality story. Commerce, we've had a positive for while linked to that structural plus cyclical profitability story. BCP we have discussed already. So on negative side, Pfandbriefbank remains on the negative outlook, RBI has been on negative outlook for a couple of years now. And UBS, we took a look at their progress after they reported in a month or so ago, but has stuck with the negative outlook for now, albeit the progress looks good. Okay. Moving on. Yes. So a few more bits and pieces on what we took away from reporting season. So on the next slide. So I won't read out this list. But in effect, have we taken lots of rating actions linked to bank's reported results and sort of forward-looking statements. The answer is no. What was reported was very, very substantially in line with what we expected. A lot of interest in bank net interest margins where they're headed to, and they are headed in at this point in different directions, in different markets and for different banks. Albeit we're not expecting NIMs to plunge even if they have come off the, let's say, the core of the peak already. But some will drift downwards some continues to drift upward a bit others will move sideways. That is probably the still a big item in terms of where revenues -- bank revenues are headed to, given the general low growth credit growth environment, the so-so outlook for fee growth as well. Operating costs, I think, is quite a big story around, yes, they've got up the [ WACC ] when revenues come down, will costs still be going up and therefore, sort of a double hit to pre-provision profitability. I think banks are focusing very hard on trying to contain further rises in operating costs. Very, very few banks would actually be able to cut costs this year and next as it's more around constraining the cost growth. Asset quality is [indiscernible] that is very, holding up well, albeit that will probably come off a bit as the year goes on. We called out France as a system where a profitability really hasn't improved cyclically. That said, there is differentiation on the French majors. I mean, banks like Credit Agricole and the [indiscernible] do get significant benefit from being in reasonably good shape and also being pretty well diversified around other lines of business outside of French retail, commercial banking, which is a pretty tough market. Shareholders getting their rewards was probably the #1 story from results and those distributions continue. We look through not having taken negativity actions, we are implicitly and also explicitly comfortable with what banks are doing currently on distributions. I think not least given me sort of the asset quality environment still seems to be holding up reasonably well. Like if the life got tougher on Asset Quality, I think we would be expecting banks to be a bit more careful or, let's say, a bit more [indiscernible] on distributions, particularly the buybacks, but we're really not at that point yet. What else M&A, it probably will be a bit more of a story this year, being nationwide. Virgin Money is sort of eye catching. There are a number of reasons why M&A sort of shouldn't happen. And certainly cross-border. Equally, there are probably plenty of reasons why it should happen within banking markets. And may i be surprised if that's the last deal announced a big deal announced this year in Europe and that's it really. Yes, I won't label those anymore. The chart on the right talks about sort of sentiment in management comments, we did a bit of analysis on that. And generally speaking, I mean, [indiscernible] always tends to be a bit positive this summer, yes, seemingly, but yes, sentiment remains pretty good in terms of analysis of management's sort of words and tone. Next couple of slides, I won't talk in any detail on 3 sides. There's one on profitability. I think potentially, we're expecting profitability to come off, depending on the market a little bit this year, maybe 2023 was the peak for many banks, albeit maybe not all of them, but there's quite a big difference, I think, in that story. Never expecting in some countries that probably gone beyond the peak already, Others, they may be flat line in U.K. sort of somewhat flatlining. France, Germany, maybe somewhat flat lining, maybe slight improvement this year. Spain probably repeat on its way down, Sweden similarly in terms of centers of preprovision before we get to the asset quality story. The Swiss dot there on that right-hand chart would be led out to UBS story, given the, yes Credit Suisse deal last year. Next slide talks about right valuations and also the final one as well to a degree. Bank valuations have improved. Obviously, that's more of an equity story than the credit story still, it does matter from our credit perspective, that banks do have access to further capital that they're not under pressure from the market from shareholders that they are able to have a degree of operating stability. And the extent to which bank valuations have slightly improved in Europe is a positive, no doubt for us. And to the next slide talks about yes, where the banks are meeting cost of equity? And there's a little piece we published on this. I won't sort of recap it totally, but that more European banks now covering cost of equity, net albeit cost of equity has to be estimated. But most banks are sort of just about covering cost of equity and not covering costs of equity in France, for example, Germany. And so it's not, I wouldn't say European Bank strategy [indiscernible] on this. But the higher profitable banking systems will remain highly profitable. The ones that have persistently struggled a bit, we'll continue to do so in France, Germany, whatever. And property has peaked, then this story clearly still has some legs. Profitability sort of trends downward sort of next year, year after that. Okay. Great. I'll hand over now for the main event over to Sylvain.

Many thanks, Giles. Hello to everyone. So let us turn to the European macroeconomic outlook. On the next slide, you have our current forecast on screen which are for a soft lending of the economy amid high interest rates. I must confess we will have our new forecasts published by next week, Tuesday. So I apologize that I'm not allowed at this point in time to show them today. But I can give you an idea of the direction of our changes. So first, compared to the table you have on screen, U.S. growth is likely to be revised upwards for 2024. You have seen, we have published on the outperformance of the U.S. economy, which is threefold fiscal policies, more generous, the geography protected the U.S. from the energy price shock. And there is also a slow transmission of monetary policy to the U.S. consumer slower than what we have compared to the European consumer. We will continue to see Chinese growth stabilizing below 5%, no big change here. And for Europe, we continue to believe that the rest of 2024, we'll see an improvement in activity and a moderation in employment growth. That said, we are less convinced that the rebound in growth in 2025 and 2026 will be a strong one. And this for two reasons. The first one is that productivity has fallen below long-term trends in Europe. And it's a bit early to say whether it's cyclical or structural, that can be of the two. And the second reason why we are less [indiscernible] on the growth rebound 2025, 2026, is that the implementation of the investment and reform plans of the European Commission, so-called next-generation EU has fallen clearly behind schedule. This translates into less growth. On inflation, the pace of this inflation has surprised in the recent months, especially at the end of last year due to energy prices, and we will probably have to screw down our inflation forecast for this year. However, we will revise slightly upward inflation for 2025 and 2026. And this is because of current wage developments, which are only very slowly moderating. Still pointing to 4% growth, what is far above the expected rebound in productivity. So meaning there are still pressure on current inflation. And this brings me to our expectation for monetary policy and especially the ECB on the next slide. We expect the ECB to cut rate 3x this year starting in June. So absolutely no change in our expectation. And I think I was listening to Christine Lagarde yesterday in Frankfurt and actually really confirm this view, even before the Fed meeting. However, we see the scope for further ECB rate cuts in 2025 as much more limited than previously thought. You have a few of our, an idea of our [indiscernible] on the left hand. In our soft lending narrative where growth goes back close to potential and inflation remains slightly above target before coming down to target. There is no big reason from a [indiscernible] approach of monetary policy to cut rates many times. So, that's the reason why we now only consider the ECB to cut rates 3x in 2025 rather than 5 as we've seen before. And we believe that the deposit facility rate could bottom out at 2.5% next year instead of 2% since previously. And final point for me, the new ECB operational framework is a very important point in our forecast update. So Nicolas will say more on that, but the bottom line is that the new ECB framework will not tighten access to liquidity for banks. And will not lead to an acceleration in sensitive tightening. It means that the unwinding of TLTRO's and the passive runoff of the current bond portfolios will remain the main forces for the reduction of the balance sheet. Accordingly, the balance sheet of the Euro System is likely to total around EUR 5 trillion by the end of 2026 compared to EUR 6.8 trillion today. And, what's more, the Euro System balance sheet is likely to increase again from 2026 onwards, when the ECB will have introduced the so-called structural long-term refinancial operation and structural bond portfolio. So we missed details on these two new tools at this stage. We will know more later, but I could imagine that's both [ tools ]. So both the structural long-term refinancing operations and structural bond portfolio will aim to foster the greening of the financial markets. And importantly, also these new projections in terms of ECB balance sheet have led us to revise down our forecast for long-term government yields. We consider that [indiscernible] 10-year bonds could average at 2.4% this year compared to 2.9% before. But enough of my remarks, I'll be happy to answer questions later and to dig on some of the topics I touched. Let me now hand over to Nicolas, who will explain what is at stake for Eurozone Banks with the new ECB Operational Framework. Nicolas, please?

Thank you very much, Sylvain. Good afternoon to all. Indeed, if we turn to the next page, now we'll spend a few more minutes looking into a bit more details on this operational framework that ECB announced last week and that Sylvain already mentioned, this is on the back of a short note that we published last week, and I think you can download it here. So I refer you to that for even more detail than what I can say here in a few minutes. In a nutshell, what ECB refers to as the operational framework to the set of instruments that it uses to steer short-term interest rates. So it's pretty important for ECB because it's about the transmission of its monetary policy into the financial conditions, and ultimately into the real economy, obviously. And you can see here on the bottom left of the slide, the 4 main tools that the ECB uses to steer short-term interest rates. So it's open market operations, which are well known. So the QE programs and the main refinancing and long-term refinancing operations with the banks. It's tending facilities, the deposit facility and the marginal lending facility, its reserve requirements that it imposes on the banks, which are set at 1% of deposits, debt securities and money market paper held by the banks. And it's forward guidance. So all of these tools are used to steer short-term interest rates. And if we go back to the history and again, without going into too much detail, you can see on the right-hand side that the QE since 2014, 2015, has led to a very large increase in excess reserves. That's the purple line that you can see with really two steps, right? The first QE cycle 2014, '15, '16 and then the pandemic burst that we saw with excess reserves reaching almost EUR 5 trillion at the beginning of '22 and now the decline due to TLTRO repayments. And important to keep in mind that the effect of this expansion of QE and liquidity was that the, an effective disappearance of the interbank markets that, where the banks used to fund themselves. And you can see that, and we've tried to illustrate this in this chart by looking at the distance between the interbank market rates, which is here taken as the Euribor, for instance. So the Euribor versus the deposit facility rate and versus the main refinancing operations. So before QE the market rate used to operate within the corridor. So you can see that there's a positive spread to the DFR and a negative spread to the MRO. And with QE, what happened is that this market rate was pushed to the floor. So now the ECB operates a de facto floor system, meaning that the interbank rates are close to the deposit facility, which is the bottom of the corridor, if you wish. And so the question without setting this technicalities aside. The question for banks was whether the ECB with this new operational framework would effectually roll back or undo some of these changes that came apparent in the past 10, 15 years, which, so the question number one being QE and the unwinding of that, but there are other aspects that ECB had tweaked in the past and could have undone if you wish. Related, for instance, to the, how it operates its main refinancing operations. A key effect there, for instance, is the full allotment procedures, which have been in place since the great financial crisis, more or less, through which the banks can be served their full needs for liquidity at the ECB through the refinancing operations under broad collateral conditions. And so the ECB could have either announced the discontinuation of that or a tightening of collateral conditions. Another change that they had done in the past was on the minimum reserve requirements, which had been lower to 1% from 2% in 2012. So the question was whether they would roll this back and take this back to 2%? So this is what was at stake for bank to question. And we had published actually in the last part of '23 and the potential impact of accelerated Q3 of an increase in reserve requirements on the banks, and our message back then was that this would have been a dent in profitability, if you wish. Now what the ECB announced last week, and that's turning to the next page and that Sylvain already mentioned, is that basically, they will keep the status quo. So they will continue with the operating framework as it's been in place since this crisis times, if you wish, by operating still a floor system, but demand driven. Meaning that they will offer full liquidity to the banks to meet their needs for liquidity while gradually, very gradually bringing down their asset portfolio but acknowledging also that they will maintain a structural asset portfolio going forward as Sylvain was meaning. So for banks, this means that the liquidity in the banking system will very gradually reduce and probably remain ample over time. And so we see this, if like it's a story of no change is good news, if you like, as we think that this will not tighten compared to the situation that we have today, the conditions for banks access to central bank liquidity. Importantly, they will continue to receive full allotment against their requests with the same broad collateral conditions. And we wait, of course, to see the details of this long-term structural refinancing operations, but that's also another indication, but the ECB is intent on keeping sufficient reserves in the banking system. As Sylvain said, there is no acceleration in the pace of QT. For banks, this means that the reduction in deposits basically QT leads to a form of reduction of deposits over time. And this will continue to be very gradual. So there is no intention to accelerate that. That's also a net positive, if you like, for banks compared to the counterfactual, which would have been an acceleration of QT. So these are the main takeaways in terms of funding conditions and access to liquidity. On the next slide, the further announcement was around the minimum reserve requirement, which was kept at 1%, so again, as we had commented, an increase in this minimum reserve requirement would have caused some income to the banks. Simply because the minimum reserves are not remunerated by ECB since September last year. So this was money that was, that is parked at ECB at zero income, and so if you increase that, obviously, there is a loss of income for the bank. For the banks. And so this is not happening. That's, I guess, the piece of news and probably relief for some banks. And finally, the ECB announced that they would tighten the spread between the rate at which they provide their main refinancing operations and their deposit facility rate. So today, the spread is at 50 bps and they want to take this to 15, 1-5, 15 bps in September. And we think that this is intended to limit the volatility on the money market rates. And we interpret this as ECB not being a bit skeptical about the ability of the money markets to properly transmit monetary policies. So basically, they want to keep tight control on the interbank, the money market rates, by narrowing down the corridor to 15 bps. And under these kind of conditions and given the preferential collateral terms and the full allotment procedure, we think that the banks will have little incentives to really go to the markets to fund to meet their financing needs. So this means that the interbank market will probably remain relatively inflated use going forward. So that's, I would say, the main findings. So this is, in a sense, a net positive for the banks in terms of funding costs and therefore, profitability, if you wish, going forward. Again, it's not a positive compared to the current situation because basically, is just kind of prolonging or shining the current situation, if you wish. And by the way, they've announced that they would review this again the parameters in 2 years. So probably we'll have some updates in 2 years, and we'll have to see whether they are thinking evolves until then. So this is the summary that we wanted to share with you and our views on that. And on the next slide, which is also the last slide. I recall what other central banks are doing in Europe. So this is not only a question for the ECB. This question is around the size of the balance sheet and the refinancing operation to the banks. Also the U.K. has been taking some measures over time on this. They've actually started their form of QT since February '22. They've recently accelerated the pace of Q2. The difference with ECB is that the Bank of England is actively selling bonds. And now the pace of reduction is EUR 100 billion per year. And they have also announced a short-term repo facility in August '22 to maintain sufficient Central Bank reserves with the banks. As they proceed with the quantitative tightening. So it's pretty similar system to the one announced by the ECB. Yes, relatively similar. Similarly for Sweden, I will go fast, but this is more or less the same story as in the U.K. with a gradual reduction in the size of the balance sheet, so quantitative tightening proceeding and they ensure that banks demands for liquidity are met. In Switzerland, we have some work there. The situation is a bit different simply because they made much less use of QE to begin with, and they have still different allotment procedures, as you can see the details there. So the Swiss system is a bit different compared to the ECB, the U.K. and the Swedish systems in that regard. So that concludes our presentation and what we wanted to share with you today. I think you can find further details in our various research papers that we published in the last 2, 3 weeks on all of these topics. And I hand over back to you, Osman, for the Q&A.

Fantastic. So thank you Nicolas and Sylvain and Giles. So yes, let's move on now to the Q&A part of our webinar. A reminder that you can ask questions at any time using that Q&A box located on the main screen of the webcast console. And just to add that the relevant articles on today topics are available for you to download on the resource box as well. So I'm going to turn to you, Sylvain, for our first couple of questions, if I may. Just with regard to the ECB. So the presentation covered kind of the short term. The question that's come in for Sylvain is, do you expect any long-term ECB liquidity for [ Eurosystem ] banks? Any thoughts around the structural longer-term credit operations, what could this look like? And what could the bond portfolio look like? So if I can turn to you Sylvain for that?

Thanks, Osman, for this key questions, I would say, for the future of Eurozone banks and monetary policy. So I have early thoughts at this stage in three directions. So, the ECB have said they are thinking about the introduction of structural long-term refinancing operations and a structural bond portfolio. This is an old story by the ECB, by the way, the structural bond portfolio. So that's not new. But I think it's likely that both these new tools will support the second part of the ECB mandate, which is to support the economic policies of the European Union. What are the main objectives of European policy right now, it's about fostering the green transition. So I could imagine that both the structural long-term refinancing operation and the structural bond portfolio will aim to green the financial system. Maybe we can think about some kinds of TLTROs to foster green lending, maybe something like that. Another aim, which is developing fast, I must say, unfortunately, this is about defense. There has been a clear appeal by the European Commission for the European Investment Bank to finance the European efforts of defense and military spending. Can -- the ECB can probably not directly do that, but maybe in a structural bond portfolio, the ECB could make or could give a large share to sub-financial [ non ] bonds issued by the European Investment Bank, for instance, to help a bit. Maybe this is a second thought. In any way, I think also, this is my first, my first, my third thought, or I think that both tools, structural LTROs and structural bond portfolio will have a shorter duration than the current tools. The huge losses, the Eurosystem is making on QB, we probably translate in a reduction of the duration of the balance sheet. Just to make sure that the balance sheet does not interfere with monetary policy or interfere less with monetary policy and up and down of the policy rate. So maybe the ECB will try to have a shorter duration of the structural portfolio compared to the 7-year duration of the APP and the [ PEPP ] maybe 4, maybe 3, I don't know. And maybe also the structural long-term refinancing operation will have some shorter duration than the current 3 years duration for the TLTROs. So that's assets, early thoughts. We will know more in the next few years, but that's likely for me. Thank you. Back to you.

Very interesting points there on the European defense needs and how these may be used to some extent, quite interesting. I may stick with you, Sylvain, if I may, just for a question that came in on interest rates. So I'm going to share the relevant slide in a moment. But the question that's coming is, what are your views on the likelihood of the ECB cutting rates ahead of the FED. Have they ever moved first?

Well, we expect the Fed to cut rates in June. The ECB also -- the ECB meeting is a few days ahead of the FED meeting. So de facto the ECB will cut first. We have had the example today, or yesterday, sorry, with -- no, today with the Swiss National Bank that the [indiscernible] cut rates ahead of any other large central banks in the [ DM ] space. And I think really what Christine Lagarde said yesterday at the ECB watch [ conference ] was crystal clear. They will -- they are most likely to cut rates in June, not before. So, that's my answer.

Very clear. Thank you Sylvain. Nicolas, I'm going to move to you next, if I may. Maybe sticking around the topic of kind of monetary policy framework but a slightly different approach. The question is your thoughts on the impact on banks' LTRs and funding requirements from ECB asset sales? Nicolas if I can turn to you for that.

Sure. Thank you very much, Osman. So asset sales, meaning an acceleration of QT and a switch to an active form of quantitative tightening, which DCB has not announced. So we had actually commented last year on this, and we brought this to webinar, I think last year about what could happen if the ECB were at some point to go for this? And I think our finding was that depending -- I mean the answer is basically it depends. The impact depends from the bank's perspective, if the ECB starts to sell bonds and the banks buy those bonds using their reserves, they're basically just swapping reserves for bonds, which are mainly government loans which have good HQLA value. So the LCR sees limited impact from this kind of operations. Now if the ECB sells its bonds to a nonbank, which uses its deposits to do that, then, of course, for banks, this is an outflow of deposits. And that's what we were saying, that an acceleration of QT can lead to some form of reduction in deposits in the banking system. That's also what we've seen in other banking systems. But again, given that now we have, I would say, a bit more visibility on the fact that the ECB, as Sylvain was saying, will likely continue with its passive mode of quantitative tightening with no straight asset sale, but rather just letting the books runoff which takes a lot of time to happen. So I think now our prediction, Sylvain said, is for -- to reach still EUR 5 trillion of assets by end of '26. So that's in the 2.5 years. So this is a very gradual runoff and we think the impact would be fairly limited, therefore, on the bank's liquidity and funding situations. Again, it's not completely discarded that it could accelerate and switch to active duty. But they have not announced that. And I'd say that this is not the outcome of what we read from these changes in the operational framework. And also, let's remind ourselves that the current [ FCR ] levels in Europe are far above the minimum requirements, right? I think that the system average were above 150 bps, 160 bps still today. So yes, that would be my answer. Back to you, Osman.

Thank you very much, Nicolas. So Giles, if I can turn to you for the next couple of questions, you covered in your part of the presentation kind of our views on profitability. The first question for you, Giles, is which banking systems are most at risk from lower earnings? If I can ask you for that one, Giles.

Yes. And I think lower, we would say a bit slower rather than anything particularly. I think some of the banks in those [ my insights are ] Spain, Netherlands to a degree, sort of the Scandinavian countries. Some of the net interest margin started to move from the fourth quarter. Shows it probably may have peaked, but I think particularly the question then is around credit growth. Will the credit growth going positive? Would it be negative? That would either mitigate a fall in NIM or else accelerate in the way and need to significantly lower NII. So I'd call out those countries as being maybe slightly beyond the peak. But overall, profitability remaining significantly higher than it has been for a good long while.

And then kind of the related question is which issue is in the European banking sector do you see as facing challenges due to liquidity or to regulatory capital? Any thoughts on that?

It's going to a very short list because regulatory capital, most banks are pretty flush with it right now. That's why they're paying significant distributions out the door, albeit -- no, it's still pretty rare to pay 100% of earnings, but a lot of the banks are now paying sort of 50% to 80%. And now having without an expectation really of much risk-weighted asset growth. I mean Basel III looks relatively affordable and obviously, it's quite a long rollout and then implementation period for a lot of that. So actually on capital, it's hard to think of a bank in Europe where is -- they're struggling on the capital side. I mean we sort of sometimes pick holes in the quality of the Greek Banks' capital, for example, but -- and their overall levels are a bit lower. But generally speaking, it's not a great concern to us. And on liquidity to Nicolas' point, I mean, the ECB is remaining very accommodative to banks that need it. Obviously, it doesn't come for nothing if banks go to net borrow. I think where we see maybe more interest is around -- on liquidity would be around contingent liquidity. And the lessons from last year were around banks needing to redouble efforts to monetize more of their balance sheets. Now that's where our #1 interest is in liquidity right now. And then the other aspect really would be on funding, the quality of funding franchises, the extent to which banks can avoid their deposit. The overall price deposits going up. Obviously, the stronger their franchise, the more current accounts they have, the less reliant they are on savings accounts, particularly where they don't have a credit franchise, the better the banks with strong wholesale markets franchises as well. So we see funding interesting more for a cost than an availability perspective, but it plays into profitability and then capital, we're relatively happy.

Giles, I'm afraid I'm not going to give you a rest just yet. If I may stick with you for a moment, you may wish to bring in Nicolas to this one as well. So I'm going to read the question as it was submitted, but maybe you may have some comments on the premise of the question as well. The question is the dramatic changes to the rate environment has exposed deficiencies in the hedging strategies of some of the EU banks and will likely expose more as rates go down. How is that factored into ratings? Over to you, Giles.

Yes. So I'm not -- don't think individual banks are having sort of deficient hedging strategies. But clearly, some banks do differ, they do bank treasuries from [ bank's back end ], some of the [ carry ] countries on have different approaches to hedging interest rate risk. Some just have a different risk appetite for interest rate risk generally, albeit within the bounds of what the supervisors are comfortable with. So I mean, U.K., you've got sort of the structural hedge story, which all the major Euro, U.K. banks do. And that fact will continue to support net interest margins this year as -- even if deposit rates go up, foreign costs go up. There's some banks last year that maybe that had hedged differently would have got a better -- bigger benefit from the rise in policy rates. Those conversations are very much passed about discussion with bank treasuries. We haven't taken negative actions because banks have overhedged previously, for example, but clearly, they may have underperformed slightly on profitability than relative to what they could have done.

Thank you, Giles. I'll come back to you in a few moments and with some more questions that are coming to you. But I might turn to Nicolas Charnay next. We didn't cover this in the presentation, Nicolas. The question has come in with regard to commercial real estate, a very hot topic in banking, obviously, at the moment. And the question is, how much more pain do we expect from CRE in Europe? And are the ratings bank ratings reflecting in that? Nicolas, over to you.

Thank you, Osman. Maybe a simple and short answer to the last part of the question, are the ratings reflecting that? Well, yes, I mean, by definition, our ratings reflect the risks that we see and how we assess them at any given point in time. So that includes also exposures to commercial real estate, which, of course, has been a key area of focus for us in the past quarters, given the interest rate developments. I think on the broader view on CRE story for European banks, our views haven't changed much from what we have communicated, I think, in December, where we said that given the size of these exposures in the European banking system, which is around 10% of the total loan book, some countries a bit less, some countries a bit more. And this 10% includes also a variety of exposures with different underlying properties and different risk profiles. And we think that the real -- most at risk segment, which is in the development and construction part and the office sector part, it's function is a fraction of this 10%. So we think that the size of the problem is not of a systemic nature for the open banking system. That said, a few banks are heavily exposed. And I think one was mentioned earlier in the presentation, which is a monoline CRE lender, Deutsche Pfandbriefbank, which we took two negative rating actions in the past few months. There are a few other unrated, very highly exposed banks in Europe. But again, if we take a step back, if we look at the performance of the CRE books in the past 2 years, there has actually been a relatively limited amount of problems coming up. The exception are the U.S. portfolios for the banks, especially the bank that I mentioned before. I think in the U.S., the CRE situation is a bit different. You have much higher vacancy rates in certain cities than what you see in Europe. So overall, this is an earnings problem and a problem for banks that are monoline exposed to that or very heavily exposed to that, but for the banking system in Europe as a whole, this is some credit cost that will come. This is part of the normalization of credit costs that we expect, and this is not a source of systemic risk for us, in our view, for European banks. But of course, we look at this very closely. Giles mentioned that we affirmed the rating of Handelsbanken in Sweden earlier this month. And that was, of course, one of the key areas of our focus in that rating action, just to give you an example. Back to you, Osman.

Nicolas. I'm going to turn to Sylvain again for the next question. It's on the ECB, Sylvain for you. The question is the ECB has not disclosed any change to the public administration accounts of the central banks. Do you expect any change in this regard going forward? Over to you, Sylvain.

Yes. That's a great question. So no, I don't think that there will be any change in this regard going forward for the reason that the ECB can not do much as regards accounts of government and public administration. Credit lines, direct credit lines or things like that would be in breach with the European treaty. So I think -- so I don't expect any change to be sure.

Very concise and direct answer. Thank you, Sylvain. Nicolas, if I may turn to you for the next question. The question is asking for views on the adequacy of deposit modeling. The ECB is quite focused on this. So what's your thoughts on that?

Sure. Well, that's a good question. Deposit modeling, this has been a very big question that we've all had since the ECB started to raise interest rates and other central banks, really, it's not just ECB. But since the rates are increased, the key question was whether banks would be able to control their deposit costs and whether deposit would start to move and migrate towards fixed term. We have some statistics on that in some publications that we made recently. And I think overall, the story has been that the deposits EBITDA as we measure it, have been relatively low in Europe. As a matter of fact, the repricing of deposits by European banks has been relatively low. And I think we tie this to the level of liquidity and the availability of deposits really for European banks, which made them not really in a position to have to [ be there ] for deposits. And so against this fact that we've seen in the past almost 2 years now, the modeling that the banks have done was probably anticipating worse than what effectively happened, right? In many cases, in the banks we speak to, they were probably expecting more repricing of their deposits than what they effectively sold. So it's been surprising, if you like, on the upside to some extent. Of course, that's what we see. The quality of -- bank by bank quality of deposit modeling will differ. The ECB has been on that. They've been communicating their expectations to the banks. We note that in the European regulation, there are some backstops that are in place. For instance, banks cannot model deposit maturity beyond 5 years for certain core deposits for the purpose of their regulatory shock scenario analysis. So that's a bit of a backstop against, let's say, extreme deposit modeling by some banks. So this helps. Yes, so that's what I would say. It's a good topic. It's something that we discuss actively with the banks. Back to you, Osman.

Thank you very much, Nicolas. Giles, if I may turn to you, if we still have got time, yes. Giles, if I may turn to you for the next question on ratings convergence. It's quite a long question, and I'll try and summarize it. But, the question is how much ratings convergence is achievable in the near or medium term between banks in the European periphery versus the European core? And the question is really, is the private and public sector deleveraging over the years as well as more coordinated regulation supervision and better capital positions underwriting? Is that fully recognized by S&P? Are we keen to revisit the sovereign cap on banks in particular within the Italian sovereign? So a long question for you, Giles, if I may.

Great. Yes. So yes, peripheral European countries are definitely where we've seen more upgrade action over the last couple of years than probably anywhere else. Some of that is linked to improvements on the sovereign side, sovereign financing and that has various drivers. Some of it is linked to deleveraging, improvement in nonperforming loan portfolios, for example. Some of it is linked to deleveraging and improving funding profiles for banks. That's dependent on nondomestic funding, for example, less leverage in the economy, particularly on the household, also the corporate side. So those sort of positives. And then, of course, a degree of work on, let's say, structural profitability, improvement clearly on cyclical profitability. So it feels like a pretty good story. Capital levels increasing as well. Some of these banks, as I said on the opening chart on the BICRAs, where we have recognized improvements over time, and there is a sort of steady drift of those higher-risk countries, jurisdictions like Greece, Cyprus, downwards. Portugal [ in S&P ] announced sort of in the pack, I would say, not quite worse [ extended ], but in Sweden, but in the pack of around sort of economic and industry risk, albeit possibly may come further, may improve further. So there is -- essentially, there is some more momentum still to come. On those, those banks in Greece, we've obviously got positive outlooks, positive outcome BCP as well. So that's visible there. I think the limiting factor, I wouldn't, certainly wouldn't call it cap, is sovereign ratings. That's particularly relevant in Italy. I should say also Ireland, one might think of Ireland as peripheral country, but the ratios of the Irish banks have improved dramatically. Down to intrinsic creditworthiness, but also ALAC as well and the maiden buffers. And those are now in a pretty much equivalent with some of the -- close to where some of the major European banks are. Yes. So Italy, I mean, yes, there are some banks, I suppose, capped by -- in terms of rating. I mean [ immunity ] credit is the main one where it could be rated higher. If Italy was rated higher. Is this more a hard cap? I mean, ultimately, there are ways for banks to get beyond the sovereign rating level if they are well diversified outside of their jurisdictions and would be, we think, high resilience to sovereign default. So it is possible for banks to get above the sovereign, and Santander in the past has been above the Spanish upper rating. Credit doesn't pass that test at a minute, but that would be -- that is one path that would require probably a significant change in terms of extra capital or bailing capacity. On the bank side or else as sovereign upgrade. So that's likely to remain a limiting factor unless one of -- other of those things changes.

I'm going to squeeze in one more question, if I may. Nicolas, this is, maybe this is for you. I know you recently published on interest rate risk in the banking book and how we think about that in [ ratings ] that's available to people download in the resource console. The question, Nicolas, for you is, would you expect changes in the near term, for example, given that the 200 basis point threshold is hopefully in the current rate cycle? Any views on that? And any changes applied to that, what would be the timing? Nicolas if I could ask you to take that one?

Sure. So indeed, there is a reflection at the Basel level on this, actually there was a public consultation launched in December. I don't have it exactly in front of me right now, but it was issued in December. To be honest, I don't recall until when it runs, but as part of this public consultation, the Basel Committee proposed to recalibrate some of the shocks, which are used for the supervisory outlayer tests, which the banks have to run, report and disclose also. In the results and the recalibration is upwards. If I remember on the euro, there's differences between parallel shift and short increase, but I think it went from 200 to 250 bps in the parallel shift up. So a recalibration upwards of the shocks. And I think a key question that emerged from this consultation is whether the threshold for supervisory reaction should also be moved under the Basel standard set at 15%. So if there is a change in EVE, economic value of equity above 15%, then this gives us -- have the possibility to step in and request changes to the banks. So the question whether this should also be recalibrated. So I think policy discussions are definitely ongoing. There is a public consultation. So change is likely, I would say. Exactly what and how we'll have to see. But between this Basel change and then implementation into EU standards, the EBA would have to revise its standards that will take some more. So I don't really have time line in mind, but we're not talking about something for this year, I think we're talking about something at best next year, I would say.

Fantastic. Thanks, Nicolas. So time is against us. So let's end the Q&A here. As I mentioned, a lot of these topics or all of these topics that were covered today are available in the articles that we published, which are on your screen now and available for you to download in the resource box. Also in the resource box, you should find a link to register for our upcoming European Banking Conferences that are taking place in London, Paris and Frankfurt in late September, early October this year. So please do register for those, and we'll keep you up to date on how the agenda is developing and the speakers that we have. We'd love to see you in person at those times. But for now, I think we'll close the webinar. So as a reminder, today's webinar was recorded for replay and will be placed on the website after we end. You'll receive an e-mail once that is available for you to take on. And for all our publishing on this topic, please do visit our website as shown on screen now. And finally, your feedback is really important to us. A survey is going to pop up as we end this session. So it'll just take a few minutes, if you can to please provide us your feedback. We do read it very carefully. So that concludes today's webinar. Thank you very much for joining us, and goodbye for now.