The Outlooks on almost half of emerging market (EM) bank ratings remain Negative, Fitch Ratings says in a new report. The report outlines prospects for banks in each EM region and reviews the financial metrics of 52 major EM banking sectors in detail.
The Negative Outlooks capture the pressures on banks’ asset quality from the pandemic and the expected lagged impact of last year’s economic disruptions. There has only been a moderate increase in non-performing loan ratios in most EMs, and these have even fallen in some countries. However, loan-quality deterioration in 2020 was disguised by regulatory forbearance or debt relief measures, but these had either expired by the end of last year or expire this year. This may result in continued pressure on EM banks’ reported loan quality ratios.
In some cases, Negative Outlooks also mirror those on some of EM sovereigns and parent banks. Since end-1H20, Fitch has downgraded 8% of EM bank ratings. For a further 8% of EM banks Outlooks were revised to Negative during the same period. Most of these rating actions were triggered by negative sovereign rating actions.
The share of Negative Outlooks is particularly high in Latin America (80% of bank ratings) and in Middle East and Africa, with concentrations in Kuwait, Oman, Saudi Arabia, South Africa and Turkey. Stable Outlooks prevail in Asia (except for India) and the CIS (except for Belarus and Armenia), due to larger buffers, considerable rating headroom and state-support considerations.
Operating Environments Challenging, But Stabilising
The operating environment (OE) remains challenging – though to varying degrees – in most emerging market banking systems in Asia, excluding China. This is because most jurisdictions’ OE have weakened in the past 12 months even if their outlooks are now stable, which is largely the case in the region except India and Sri Lanka. More signs of positive and sustainable improvements are appearing in markets where the virus spread has been better contained. Relative to 2020, we see improving business generation prospects and sector outlooks in China, Taiwan and Indonesia, notwithstanding asset quality risks.
Challenges are greatest in India (with a surge in new coronavirus cases exacerbating pre-pandemic issues around asset quality and capital shortfalls), Sri Lanka (sovereign/macroeconomic risks) and the Philippines (a stubborn infection rate testing past years’ underwriting standards). Thailand (slow economic recovery) and Indonesia face further loan stress. But loss absorption should adequately mitigate risks. Meanwhile, relative economic stability in Malaysia, China, Korea and Taiwan should also limit near-term downside risks to reported loan quality. Financial Profiles to Benefit from Better Business Conditions Apart from macroeconomic conditions limiting the extent in which reported asset quality weakens, we see greater prospects for extending regulatory relief in markets where economic recoveries are more fragile. A firmer footing for generating business opportunities and less pressure on credit
costs should support earnings prospects and, in turn, bank capital levels – with India a notable exception.
Nevertheless, impaired loans will inevitably increase across the region once forbearance measures wind down, more instances in the next 12 months. Fitch expects impaired loans to peak no sooner than 2H21, but the risks should be manageable in light of adequate loss-absorption buffers and moderating pressure on earnings and capital. Regulatory Relief Negatively Correlated to Financial Transparency Relief measures in EM Asia have supported bank performances –particularly in India and Indonesia where banks have likely benefited most from loan classification standards on stressed assets – but at the expense of transparency on credit risks. Malaysia’s blanket moratorium also marred visibility on asset quality, but this ended in September 2020 and the current relief measures are more targeted, meaning the amount of loans under relief have fallen significantly.
Downside Risks Concentrated, China More Resilient Negative rating outlooks are concentrated in India and Sri Lanka, where sovereign rating risks are highest. Elsewhere, we see less risk of further negative rating actions in the absence of a resurgence of the virus. Several rating outlooks were recently stabilised in Taiwan, but most EM Asia banks have headroom at current VRs to weather deterioration in financial metrics, though to varying degrees.
On the other hand, Fitch sees the stability and sustainability of China’s operating environment as being supportive of more positive developments in banks’ intrinsic credit profile