RATING outlooks have turned negative for most jurisdictions compared to 2020, according to Fitch Ratings in its 2021 Global Banks’ Outlook Compendium report.
“This reflects downside risks to our baseline scenario from a potentially sluggish economic recovery following sharp deterioration in 2020 owing to the pandemic,” the rating agency pointed out.
Negative rating outlooks also reflect pressure on sovereign support-driven ratings, Fitch added.
The rating agency expects asset-quality risks to crystallise in 2021 as government support measures for economies and borrowers are unwound, while an extended period of low interest rates will affect profitability.
“Pressure on ratings could increase if the economic downturn is more prolonged than we expect.”
Key headwinds that will affect global banks include rising defaults as government support and forbearance/deferrals unwind, low rates and weaker markets income, risk of successive COVID-19 waves, weakening sovereigns/operating environments, investment needs (eg IT, digitalisation or compliance) and restructuring costs.
Meanwhile, rating outlook for developed markets (DM) in the Asia Pacific (APAC) is “negative” while sector outlook is “stable”.
This is due to asset quality deterioration despite more stable revenue generation prospects, capital and liquidity buffers superior to profitability for ratings, ongoing adjustments to business models owing to new entrants and tightening of regulation/macro prudential requirements.
As for emerging markets (EM) in APAC, the rating outlook is “stable” while sector outlook is “improving”.
Fitch said that key issues are economic rebound, sovereign support reduce downgrade risks, delays in asset-quality recognition adding to profit headwinds and digitalisation fuelling competition, but larger incumbents are better placed to benefit than smaller peers.
Back home, rating outlook for banks in Malaysia is “negative” while the sector outlook is “stable”. Key issues for Malaysian banks were slow non-performing loan recognition, lower profitability and property market risks.
Nevertheless, Fitch expects tailwinds – such as moderate economic recovery, relatively robust capital and liquidity ratios; front-loading (although uneven) of impairment charges during 2020; abundant liquidity and accommodative funding markets; and more government and central bank support in the event of further COVID-19 waves – to boost recovery of global banks. – Jan 6, 2021
