Despite unprecedented macroeconomic declines and fears of
widespread banking sector stress as COVID-19 lockdowns first went
into place in early 2020, financial sectors globally held up
remarkably well, but will that stay the case in 2021?
Regulatory reforms that followed the global financial crisis
have boosted capital buffers substantially and improved the
liquidity of global banks. The absence of widespread credit booms
ahead of the pandemic suggests major banks are better prepared to
meet the challenge of rising bankruptcies and unemployment rates
that will follow the current recession.
That doesn't mean the global financial sector won't face
challenges in 2021. In fact, underlying problems will take longer
to unfold than real economy indicators but will materialize as
support measures and regulatory forbearance start to diminish.
Banks in economies with pre-existing asset quality problems and
those operating in economies with potentially slow recovery from
the 2020 shock - like Angola, India, Kenya, and Turkey - are likely
to face a swift rise in credit risks. More resilient banking
sectors will facilitate faster macroeconomic recoveries.
Overall, the global financial sector is likely to avoid major
crises in 2021 - at least in advanced economies - but challenges
remain immense. Below, a summary of our top ten trends to watch for
in global banking for 2021.
- Regulatory support measures are likely to remain in
place well into 2021 despite positive vaccine
As countries are imposing renewed COVID-19 driven economic
restrictions, loan payment moratoriums that had expired or were
close to expiring are widely being reinstituted (as in the EU) or
extended (as in Saudi Arabia, the UAE and Egypt). As 2021
progresses, these measures are likely to be scaled back and become
increasingly targeted on jumpstarting recovery in priority and
badly-affected sectors such as services and tourism. Removing
support measures prematurely would risk the financial sector
amplifying the economic downturn by sharply curtailing its
- Despite large-scale economic declines, reported bank
impairment has not risen sharply - so far.
NPLs remained remarkably stable on average across both emerging and
advanced economies in 2020. Extensive COVID-19 support measures
have played a large role in this, and reported impairment could
rise rapidly once support measures are lifted. Corporate loans are
most at risk initially, but household credit quality will
deteriorate if permanent unemployment rises. We envisage that NPLs
will start to materialize late in 2021 if recently extended support
measures are withdrawn, but is more likely in early 2022 given the
extended timescale for corporate failures.
- Credit extension will slow as banks in many economies
tighten lending standards.
Despite initial fears to the contrary, banks globally expanded
credit provision to the real economy in early 2020, even during the
worst of the COVID-19 lockdowns. Credit growth trends exhibited
more divergence in the second half of 2020, however. IHS Markit
expects credit growth to decelerate further across most emerging
markets throughout 2021. We are currently forecasting credit growth
to decelerate across most regions in 2021. The exception could be
emerging Asia where relatively fewer extreme COVID-19 related
lockdowns have supported faster and earlier economic
- Banking sector profits will remain
Many banks have expanded their provisions to hedge themselves
against future loan losses, depressing reported profits in 2020.
Lower interest rates for lending - reflecting lower policy rates -
in combination with decelerating credit growth will further depress
margins in 2021. New and increased taxation on banks as governments
seek ways to address their widening budget deficits could
exacerbate this trend, especially in Central and Eastern
- Capital buffers should remain supported even if
dividend restrictions are lifted.
In many major economies, expansionary monetary policies have pushed
term debt costs sharply lower, conditions which are expected to
remain in place well past 2021. This offers banks scope to arrange
favorably-priced longer-term funding including the sale of capital
instruments (Additional Tier 1 and subordinated debt) supporting
liquidity and reinforcing capital buffers. We expect banks to
maintain precautionary excess capital buffers in light of
significant tail risks related to potential heavy future
write-downs on corporate loans, a threat clearly flagged in
advanced economy central bank stress tests.
- Two-speed recovery would permit stronger banking
sectors to expand acquisitions of banks in weaker
Further compression of profits and the threat of substantial asset
quality problems will accelerate banking sector consolidation both
within, and between, borders - yielding increased sector
concentration. Large banks in economies that achieve faster and
more sustained economic rebounds, like China, or banks in economies
with pre-existing expansion goals like Japan, Kenya, and the Gulf
are likely to take the lead, acquiring strategic stakes in high
growth potential economies.
- Sovereign exposures are likely to continue growing in
Banks in emerging markets, particularly Sub-Saharan Africa, Latin
America and some parts of Asia, such as Pakistan, further increased
their holdings of domestic sovereign debt in 2020. Several of these
same governments are facing severe fiscal constraints increasing
the likelihood of debt renegotiations and possible defaults - in
turn threatening to damage banks' liquidity and profitability, all
while crowding out private sector investment.
- Renewed emphasis on bank recovery and resolution
We expect regulators to restart efforts to upgrade local bank
recovery and resolution regimes in 2021. The EU, for example, is
seeking full harmonization of its framework across member states by
2024 as one of the key steps towards eventual banking union. The
European Commission is also considering making a new proposal for
the European Deposit Insurance Scheme, another pillar of banking
union, after national governments have failed to agree on a common
scheme since 2015.
- Enhanced focus on ESG (Environmental, Social, and
Corporate Governance) initiatives.
Shifting focus amongst investors from COVID-19 to the environment
will make ESG issues an increasing priority. Banks are likely to
respond by issuing ESG-targeted debt to fund transformative
economic initiatives. While this clearly is gaining focus in
advanced economies, emerging markets from Hungary to Malaysia are
placing greater emphasis on evaluating banks' exposure to climate
related risks in particular and are encouraging funding of green
initiatives through preferential capital treatment.
- The global financial sector is likely to face regular
small cyber security incidents, with continuing risk of a
Branch closures in highly penetrated markets and the shift in
emphasis to digital transactions is highly likely to continue. This
shift increases banks' potential vulnerability to damaging cyber
security incidents. During the pandemic, most cyber security
frameworks have at best been marginally improved, leaving the
threat of cyber security issues - such as customer identity theft,
digital robbery, extorsion and data leaks - a key threat to the
global financial sector and one that, at its worst, could prove
globally devastating and systemically important.
You can listen to Alyssa and Senior Economist Greta Butaviciute
discuss these issues in more detail on our podcast.