The coronavirus outbreak will have a negative impact on European banks, as it will slow down economic activity, especially in the first half of this year, Moody’s Investors Service wrote in a report released today.

“The coronavirus adds to the end-of-business cycle risks associated with tightening the prospects for growth across the region, as we highlighted in our negative estimate for European banks,” said Bernhard Held, VP-Senior Credit Officer at Moody’s, adding: “Banks will see a deterioration in the quality of their loan portfolio, as the effects of the virus will reduce global travel, factory production and diminish domestic demand in Europe,” according to financialintelligence.ro.

Under Moody’s basic scenario, the direct negative impact of credit on the European banking sector would be limited. However, an extended outbreak would have a more severe outcome, given the quality and profitability of bank loans.

European banks have improved the quality of their loans and capital in recent years, most of them well positioned to absorb a certain weakening of credit performance.

In the event of a extended disruption, the rating agency expects the highest risk of default to be provided by loans for small and medium-sized enterprises, particularly in the production sectors, as well as industries pressured by pronounced changes in consumer behavior.