THE global banking sector is facing contrasting post-pandemic prospects given the uneven recovery in operating environments (OEs) across various jurisdictions.
According to Fitch Ratings, its bank OEs which often serve as a constraint on banks’ stand-alone viability ratings (VRs) will recover at varying speed, reflecting the economic recovery in each jurisdiction and the headroom in the jurisdiction’s current OE.
The OE captures the rating agency’s assessment of the level of risk of carrying out banking business in a particular jurisdiction.
In many jurisdictions, the rating path for bank ratings on “negative” outlook will be linked to the recovery prospects of the OE, sovereign rating or both, according to Fitch Ratings.
“OE trends were negative for about 80% of banking systems at end-1Q 2021,” revealed the international rating agency. “However, some major economies are recovering well.’
In the “Fitch 20” major economies, China stands out as an economy where the OE could improve.
“Macro indicators also point to a relatively early recovery for the US,” noted Fitch Ratings.
“The OEs for South Korea, Switzerland, Russia, Australia and Indonesia have already stabilised, whereas those for Mexico, Brazil, Turkey, Poland and some major European economies remain on a negative trend.
“They may not stabilise until 2H 2021 or later, and remain vulnerable to a downward revision.”
Moving forward, the rating agency expects more bank ratings to revert to “stable” outlook as pandemic-related risks recede.
“Where banks’ ratings are driven by intrinsic risk profiles as reflected in their VRs, they will partly reflect the recovery and stabilisation in OEs and partly banks having improved rating headroom, for example due to capital retention,” noted Fitch Ratings.
For banks whose ratings are driven by sovereign support (more common in emerging markets) or whose VRs are at sovereign rating levels, the trajectory of sovereign ratings is key, added the rating agency. – April 21, 2021
