Risks to global banking sector credit quality remain significant for 2017, according to S&P Global Ratings. Protracted global economic recovery, political uncertainty, low interest rates, and the still-evolving regulatory landscape will shape the operating environment for banks globally and influence their creditworthiness in 2017, with implications for banks' earnings, profitability, and asset quality. After an extended period of material balance sheet strengthening for most international banks, we believe that low economic growth, pressure on margins, and growing competition from nonbank players will keep the spotlight on the long-term sustainability of banks' business models.
- We believe that risks for global banking sector credit quality remain significant for 2017.
- Sluggish growth, political risks, and the low interest rates will shape banks' creditworthiness trends.
- More than one-half of the largest global banking systems face negative pressure, and the proportion of banks with a negative outlook or on CreditWatch negative increased in Asia-Pacific and Latin America since our last report in July 2016.
Global Banking Environment: More Than One-Half Of Major Banking Systems Face Negative Pressure
Weaker prospects for earnings growth globally, potential risks related to the U.K.'s referendum vote to leave the EU (Brexit), and more generally increased political risks are constraining factors for bank ratings in 2017. A snapshot of banking industry country risk assessment (BICRA) trends--which reflect our view of at least a one-in-three probability that economic risk or industry risk of operating in a banking environment could change--suggests that 11 of the 20 largest global banking markets face negative pressure, while only two have positive trends, and seven are stable. Out of the 85 banking systems where we publish BICRAs, 47% of banking systems have stable trends (on both economic and industry risk), 42% have negative trends (on one of the two factors), and 11% have positive trends (on one of the two factors).
An aggregate look at our outlook and CreditWatch distribution across rated banks offers additional perspective. Compared with the snapshot from July 2016, the proportion of banks with a negative outlook or on CreditWatch negative (with a "negative bias") increased in Asia-Pacific (APAC) and Latin America. The main reasons behind this trend are: China's slowdown and its impact on the APAC region; potentially higher economic imbalances in Australia due to low interest rates; and the negative developments in Brazil. Meanwhile, the percentage of bank ratings in the Middle East and Africa (MEA) with a negative bias fell mostly due to negative rating actions taken earlier in the year (e.g., downgrades of several Nigerian banks). The proportion of banks with a negative bias in North America, Western Europe, and Russia/Commonwealth Of Independent States (CIS) and Central and Eastern Europe (CEE) were largely unchanged from July. The highest negative bias continues to be in Russia/CIS, primarily reflecting Russian banks and their stressed economic environment.