Banking Risk Monthly Outlook: August 2025

Our banking risk experts provide insight into events impacting the financial sector in emerging markets in August.

What we're watching:

• Asian countries that have entered into trade agreements with the United States are likely to see the potential increase in credit risk that was previously linked to trade uncertainty dropping off.
• Near-term risks to Russian banks’ capital increase alongside ongoing loan quality deterioration.
• Cautious macroprudential policy is likely to persist in Europe despite economic headwinds.
• Argentinian banks will continue to adjust their liquidity, as peso scarcity remains.
• Continued strengthening of the Egyptian pound and hard currency inflows facilitate an increased interest in short- and medium-term debt instruments.

As of July 18, Indonesia, the Philippines, and Vietnam have entered into new trade agreements with the United States, which is expected to create a degree of certainty in their manufacturing sectors. The moderate exposure of the banking sectors to these manufacturing industries is anticipated to stabilize their credit risk profiles.

Looking ahead, it is likely that more Asian economies will pursue new trade agreements with the United States. Among these, Bangladesh and Pakistan stand to benefit significantly, as manufacturing constitutes a substantial portion of their loan portfolios. The reduction in trade uncertainty is expected to further enhance the stability of the region's credit risk profile. However, credit growth will remain subdued due to the current global economic headwinds.

At least three systemically important banks (SIBs) have held internal discussions on the prospect of a state-funded bailout over the coming year, according to a Bloomberg report on July 17. Market Intelligence views the state as willing to grant support to the three largest banks in the sector, given their majority state ownership and their designation as systemically important.

Although all Russian SIBs have capital levels in excess of requirements, implying immediate additional capital needs are contained, the underestimation of impaired loans and risk weighted assets is likely to paint an overly favorable picture of their resilience, particularly as loan quality is forecast to continue deteriorating through 2025.

Amid increasing retail borrower demand for mortgages and subdued corporate borrower loan growth, national authorities were recommended not to unwind macroprudential policies by the European Central Bank on July 7, given financial stability risks derived from greater trade policy uncertainty and weaker economic growth.

Market Intelligence notes no European banking sector regulator is set to unwind their countercyclical capital buffers through to end-2026, while five countries will introduce higher requirements during the same period. Despite the potential credit supply-side boost from looser capital-based requirements, European banking sectors retain capital surpluses currently available to meet additional borrower demand.

After a week of volatility with the Argentinian peso, triggered by the maturity of an ad-hoc debt security (LEFIs), banks purchased a large quantity of dollars and treasury notes. This might have been an overreaction from the sector, as in the next days it was reported that banks were bidding for liquidity in local currency, getting rid of their dollar positions and raising deposit rates to attract more funding.

We expect that considering the upcoming elections, banks will continue to take hedging actions that could induce further volatility regarding the asset allocation of the sector. Considering the relative monetary tightening in the country, it is likely that banks’ liquidity positions will remain tightened going forward, especially as credit growth remains strong, as expected in our outlook.

Given the surplus of US dollar liquidity held by the banking sector and still-high interest rates, market demand for short- and medium-term debt instruments, especially Egyptian treasury bonds, is expected to increase in the coming months.

As the central bank began a gradual rate-cutting cycle in April, demand for Egyptian treasury bonds is likely to increase before further rate cuts are enacted. As a number of non-primary dealer banks were added to the dedicated registry to trade Egyptian government securities this year, it further expands the range of market participants.

We may expect a modest decline in banks’ Egyptian sovereign debt holdings, given the increasing foreign investors’ interests and favorable regulatory environment.