COVID-19 and the oil price shock of 2020 are taking a heavy toll on global banks, S&P Global Ratings said on Thursday adding that it will be difficult for them to return to pre-crisis levels in the next three years. To estimate the shape of recovery for banks, S&P analysed 20 of the largest banking systems globally in its report.
It said that they do not expect the world’s largest banking sectors, including more than half of G20’s, to recover to pre-COVID-19 levels until 2023 or beyond. S&P Global Ratings has taken 335 negative rating actions globally since the outbreak began. “The hit on financial institutions globally has been unambiguously negative,” said Credit Analyst Gavin Gunning.
He said that they had already negatively revised the economic or industry trends underpinning the financial strength of many banking jurisdictions globally, that trend should persist.
Gunning added that further, they had seen negative rating momentum affecting financial institutions in most major banking jurisdictions, indicating that downside risks are to the fore. Even for less-affected banking jurisdictions, recovery to pre-COVID-19 levels will unlikely come before end-2022. These jurisdictions include China, Canada, Singapore, Hong Kong, South Korea and Saudi Arabia.
Even for those jurisdictions that have been more resilient, S&P’s outlook for banking sector credit metrics as well as metrics applicable to individual banks are uniformly weaker. In 2019, credit losses were near historical lows in almost all the higher-income countries in Asia-Pacific. Years of benign economic conditions have helped the region.
“We estimate that the COVID-19 shock to these economies will drive a multifold increase in credit losses. Economic recovery in the subsequent period should ease the credit losses in our view.”
Pandemic-related loan losses will likely sharply increase for the US and Canadian banking systems in 2020 and 2021. Such losses should tail off thereafter, pending an economic rebound envisaged in our base case. Credit losses will likely rise significantly from historically low levels for European banks in 2020 and remain high in 2021. A full economic recovery could take several years under our base case.
Emerging-market banks will likely see a sharp increase in credit losses in 2020. There is potential for a gradual improvement in the following years if economic activity rebounds, as envisaged in S&P’s base case. “Given the banks’ relatively strong profitability, we see some cushion to absorb the anticipated weak performance in the loan portfolio.” S&P said recovery to pre-crisis levels could occur for the Chinese banking system by end-2022. Other emerging markets may recover in 2023 or later.