MELBOURNE (S&P Global Ratings) Nov. 17, 2020--This year has been hard for banks but next year may be even tougher, cautions S&P Global Ratings in a report series published today.
"Support measures that have steadied banks and helped borrowers survive cannot last forever," said S&P Global Ratings credit analyst Gavin Gunning. "The expected progressive withdrawal of such support in 2021 will reveal a truer picture of underlying bank asset quality, even as economies start to recover."
Our ratings on the banks reflect the long road ahead, with about a third of bank ratings currently on a negative outlook. Since the pandemic began, we have taken 236 negative rating actions related to COVID-19, the oil price shock, and other market stresses on banks globally, about three-quarters of which were outlook revisions.
The two articles in this global banking outlook series include:
"The recovery of banking systems globally to pre-COVID-19 levels will be slow, uncertain, and highly variable across geographies," said S&P Global Ratings credit analyst Emmanuel Volland.
While profitability will stay depressed in 2021, many banks overall are in better shape to withstand stress compared with 2009. Strong fiscal support for economies is benefiting banks, funding markets are accommodative, and banks have been significantly provisioning to deal with weakening asset quality.
We see four key risks to watch:
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Economic disruption from COVID-19 gets worse or lasts longer than our base-case assumption (see below for more details).
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Short-term supports to banks and borrowers may leave longer-term overhangs.
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A likely surge in leverage and anticipated higher corporate insolvencies.
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A weakening in property--the age-old nemesis for bank credit quality.
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"Twelve months ago, before COVID-19 struck, banks faced the new year with relative calm. The scenario for banks heading toward 2021 is a sharp contrast," said Mr. Volland. "For many banking systems, we do not envisage recovery to pre-COVID-19 levels until 2023 or beyond."
In terms of our base case on the pandemic, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of COVID-19. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.