50% of Emerging Market Bank Ratings on Negative Outlook

50% of Emerging Market Bank Ratings on Negative Outlook

Fitch Ratings says in a special report today that a high 50% of emerging market (EM) bank ratings are currently on negative outlook, highlighting the risk of downgrades in 2021.

According to Fitch, the negative outlooks predominantly reflect potential deterioration in banks’ financial metrics as a result of the economic downturn driven by the pandemic.

However, the Ratings also notes that they are also in part driven by risks to the credit profiles of some EM sovereigns and bank owners.

Risks to EM banks’ financial metrics and ratings relate primarily to asset quality.

Fitch specifically noted that impaired loans will rise in most markets in 2021 as payment holidays for borrowers expire and forbearance measures are rolled back, requiring greater provisioning expenses.

“In addition, we see significant downside risks to Fitch’s base-case economic forecasts, with protracted downturns or more sluggish recoveries than currently expected having the potential to compound existing asset-quality problems”, it says.

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Revenues in some markets will also weaken due to margin compression, lower growth and reduced fees.

EM bank rating downgrades have been moderate so far in 2020, and concentrated in markets that have been hit particularly hard economically or have experienced sovereign downgrades.

Ratings have been downgraded mainly in Latin America (notably Colombia and Mexico) and the Middle East and Africa (Oman, Bahrain, Nigeria and South Africa).

Meanwhile downgrades in emerging markets in Europe and Asia have been more limited.

It explains that a combination of capital buffers, available sovereign/shareholder support and expected economic recoveries in our base-case forecasts have limited the downside for EM bank ratings to date.

Buffers, Support and Expected Recoveries

Accordingly, Fitch reckons that the relative stability of EM bank ratings to date reflects three main factors.

Firstly, the firm says some lenders entered the crisis with significant loss absorption buffers, and therefore rating headroom, in the form of capital and/or pre-impairment profitability.

Secondly, many EM bank ratings are underpinned by potential support from either domestic sovereigns or foreign shareholders, and this has largely remained intact.

Fitch Ratings’ base case economic forecasts envisage economic recoveries in 2021 and beyond which should help banks to protect their financial profiles.

50% of Emerging Market Bank Ratings on Negative Outlook