December 8, 2014 / 5:48 PM / 3 years ago

Europe's banks face tough year in 2015, ratings agencies say

FRANKFURT, Dec 8 (Reuters) - European banks face a tough year in 2015 as fresh and as-yet unfinished regulatory hurdles compound problems created by a stalling economic recovery, credit rating agencies Moody's and Standard & Poor's said on Monday.

More than seven years after the start of the financial crisis, banks have made strides towards improving financial stability but they are still struggling to boost profits.

"The European banking industry remains structurally vulnerable," said Carola Schuler, managing director at Moody's, in a presentation on the sector's outlook, adding that lenders may need to cut costs and alter their business models to invigorate profitability.

The agencies said moves to reduce implied government support for the banking sector and force bank debt holders to participate by coming to the aid of wayward lenders would also put downward pressure on bank ratings.

"The European bail-in tool decreases the predictability of state support," said S&P managing director Stefan Best in a separate presentation on banking prospects.

As a result, S&P has a negative outlook on three out of four of the 50 largest European banks.

The agency will review in early January its credit ratings for banks in Austria, Germany and the UK, three countries that plan to translate EU bank resolution and recovery rules into national 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 outlooks on S&P's list of large banks enjoying government support.

Meanwhile, the economy is providing scant support to European banks, the largest of which earned return on equity of about 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 percent next year, giving banks little outlet for lending despite rock-bottom interest rates and increasing the chances of old loans going bad.

"Our forecast does not indicate a strong rebound over the next two years," Moody's Schuler said of economic prospects. (Reporting by Jonathan Gould; Editing by David Holmes)

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