Moody's cuts outlook for European banks, including Germany's, on credit woes

Moody's sign on 7 World Trade Center tower in New York

By Tom Sims

FRANKFURT (Reuters) -Global credit ratings agency Moody's downgraded its outlook for banks in Germany, Italy and four other countries to "negative" from "stable" on Wednesday as Europe's energy crisis and high inflation weaken its economies.

The downgrade also affects banking sectors in the Czech Republic, Hungary, Poland and Slovakia, and Moody's said the grouping includes those most at risk of energy price inflation and possible energy rationing.

"We expect operating conditions to deteriorate further," Louise Welin of Moody's said.

Some of Europe's largest banks have warned of growing risks as the economy fizzles after posting stronger-than-expected profits last week.

European banks' shares have fallen nearly 25% from their highs before Russia invaded Ukraine in February.

Moody's said it expected weaker bank loan quality, profitability and access to funding.

"Rising prices will affect the creditworthiness of many businesses and households, triggering the formation of new problem loans," Welin said.

The outlook for British and Austrian banks remained stable, Moody's said.

In Germany, government measures to support the economy will not fully offset challenges facing companies and consumers, Moody's said.

"Germany's economy will enter recession," it said.

For Italy, Moody's cited stagflation risks and an expectation that the economy won't grow in 2023 after an expansion of 2.7% in 2022.

"Rising prices will dent the creditworthiness of small businesses and households, creating new problem loans," the ratings agency said of Italy.

In Poland, Moody's said banks face a near stagnation in economic growth next year, coupled with a big rise in interest rates and inflation, which will "limit growth opportunities".

(Reporting by Tom Sims, editing by Rachel More and Kim Coghill)