FRANKFURT, Dec 8 (Reuters) - European banks face a toughyear in 2015 as fresh and as-yet unfinished regulatory hurdlescompound problems created by a stalling economic recovery,credit rating agencies Moody's and Standard & Poor's said onMonday.
More than seven years after the start of the financialcrisis, banks have made strides towards improving financialstability but they are still struggling to boost profits.
"The European banking industry remains structurallyvulnerable," said Carola Schuler, managing director at Moody's,in a presentation on the sector's outlook, adding that lendersmay need to cut costs and alter their business models toinvigorate profitability.
The agencies said moves to reduce implied government supportfor the banking sector and force bank debt holders toparticipate by coming to the aid of wayward lenders would alsoput downward pressure on bank ratings.
"The European bail-in tool decreases the predictability ofstate support," said S&P managing director Stefan Best in aseparate presentation on banking prospects.
As a result, S&P has a negative outlook on three out of fourof the 50 largest European banks.
The agency will review in early January its credit ratingsfor banks in Austria, Germany and the UK, three countries thatplan to translate EU bank resolution and recovery rules intonational law ahead of the scheduled EU start in January 2016.
Austria's Erste Group and Raiffeisen Zentralbank, Germany's Deutsche Bank and Commerzbank, and the UK's Barclays, HSBC, Lloyds and RBS are among those with negative outlookson S&P's list of large banks enjoying government support.
Meanwhile, the economy is providing scant support toEuropean banks, the largest of which earned return on equity ofabout 4 percent on average in the first nine months of the year,only slightly better than the year-earlier period.
The euro zone is expected to grow by only around 1 percentnext year, giving banks little outlet for lending despiterock-bottom interest rates and increasing the chances of oldloans going bad.
"Our forecast does not indicate a strong rebound over thenext two years," Moody's Schuler said of economic prospects. (Reporting by Jonathan Gould; Editing by David Holmes)