S&P Ratings sees four key risks for global banks in 2021

  • Banking
  • Tuesday, 17 Nov 2020

A healthcare worker wearing personal protective equipment (PPE) conducts a Covid-19 test on a passenger during a United Airlines Covid-19 test pilot program at Newark Liberty International Airport in Newark, New Jersey, U.S., on Monday, Nov. 16, 2020.

KUALA LUMPUR: As the heavy toll from the Covid-19 pandemic continues, S&P Global Ratings expects 2021 to be even tougher for global banks as the recovery could be slow, uncertain and vary globally.

It cautioned on Tuesday that the recovery could be slow, uncertain and vary globally and it highlighted four key risks – economic disruption, longer-term overhangs, insolvencies and a weakening in property.

* Economic disruption from Covid-19 gets worse or lasts longer than its base-case assumption.

* Short-term supports to banks and borrowers may leave longer-term overhangs.

* A likely surge in leverage and anticipated higher corporate insolvencies.

* A weakening in property, which is the age-old nemesis for bank credit quality.

S&P Global Ratings credit analyst Gavin Gunning said in the report that support measures that have steadied banks and helped borrowers survive cannot last forever.

"The expected progressive withdrawal of such support in 2021 will reveal a truer picture of underlying bank asset quality, even as economies start to recover," he said.

Gunning said the rating agency's ratings on the banks reflect the long road ahead, with about a third of bank ratings currently on a negative outlook.

Since the pandemic began, it has taken 236 negative rating actions related to Covid-19, the oil price shock, and other market stresses on banks globally, about three-quarters of which were outlook revisions.

"The recovery of banking systems globally to pre-Covid-19 levels will be slow, uncertain, and highly variable across geographies," said S&P Global Ratings credit analyst Emmanuel Volland.

While profitability will stay depressed in 2021, many banks overall are in better shape to withstand stress compared with 2009.

Strong fiscal support for economies is benefiting banks, funding markets are accommodative, and banks have been significantly provisioning to deal with weakening asset quality.

"Twelve months ago, before Covid-19 struck, banks faced the new year with relative calm. The scenario for banks heading toward 2021 is a sharp contrast," said Volland.

"For many banking systems, we do not envisage recovery to pre-Covid-19 levels until 2023 or beyond."

As for its base case on the pandemic, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of Covid-19.

Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunisation, which could come by the middle of next year.

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