S&P Cuts Outlook for European Banks

Standard & Poor's fired a fresh shot across the bows of the battered European banking sector on Wednesday, cutting its outlook on five European banks to negative from stable, suggesting downgrades are more likely.

S&P cut the outlooks on Barclays, Allianz subsidiary Dresdner Bank, Deutsche Bank, Fortis and UBS to negative from stable, citing weak earnings and a long list of potential worries.

A negative outlook indicates the ratings are more likely to be cut over the next two years.

Market reaction, however, was muted. The Markit iTraxx Senior Financials credit default swap index, which contains Allianz, Barclays, Deutsche Bank and UBS was unchanged at 66 basis points, a trader in London said.

Bank spreads have already moved sharply wider this year, with the index having started 2008 at around 44 basis points, according to data from Markit.

S&P said the actions reflected the effect of "sustained difficult market conditions on the short-to-medium-term earnings prospects for these banks."

It said there was greater uncertainty over the contribution the banks' capital markets activities would make to earnings.

Problems in structured products, pressures to restructure, the continued freeze in the leveraged-loan market and the potential for higher litigation charges are also weighing on the banks, S&P said.

Of the five banks, S&P warned that UBS, which on Wednesday unveiled another $4 billion in write-downs, had "little scope at the current rating level for continued earnings underperformance in 2008." S&P rates UBS at AA.

Credit Suisse Now Stable

The outlook on Credit Suisse was revised to stable from positive, indicating a rating upgrade is less likely. The outlook on ABN Amro was changed to developing from positive, indicating the rating could be raised, lowered or affirmed.

S&P reiterated that it might cut its rating on Societe Generale due to the losses caused by a rogue trader and on WestLB due to concerns about its financial profile.

In the United States, S&P said Morgan Stanley's AA- rating might still be cut, and that it expected to wrap up its review of the bank by mid-March.