Fitch Ratings – 26 January 2021: A newly-updated interactive country-by-country map of bank rating trends from Fitch Ratings shows that nearly 60% of bank ratings were still on Negative Outlook at end-2020, with just a marginal decrease from end-1H20.
The proportion of ratings on Rating Watch Negative, reflecting near-term risks, fell significantly to just over 1% from 10% at end-1H20 but most of the affected ratings ended up on Negative Outlook. There were virtually no ratings on Positive Outlook or Rating Watch Positive.
The high proportion of Negative Outlooks may persist well into 2021. While immediate risks to bank ratings after the onset of the coronavirus pandemic have been largely avoided, medium-term risks remain from the gradual withdrawal of government support for the economy and for borrowers. A slower-than-expected economic recovery due to recurring lockdowns or vaccine deployment setbacks could exacerbate these risks.
Latin America still had the highest proportion of banks on Negative Outlook/Watch (87%) at end-2020. This reflects difficult operating environments across the region, which we generally expect to worsen, and pressure on sovereign ratings and Country Ceilings, to which most of the Negative Outlooks/Watches for banks are tied.
Western Europe had 78% of its banks on Negative Outlook/Watch, reflecting material downside risks to our baseline forecast of a solid economic recovery in the region in 2021. Setbacks to the recovery could weaken the asset quality, earnings, and ultimately the capitalisation of many banks.
The proportion of banks on Negative Outlook/Watch was lower in North America (60%) and in Asia-Pacific developed markets (55%). While banks in these markets face similar risks to those in other regions, they generally have more headroom in their ratings.
About half (52%) of bank ratings in the Middle East and Africa were on Negative Outlook/Watch. This is less than the global average, reflecting the significant proportion of Stable Outlooks linked to sovereign ratings in the Gulf Cooperation Council, and the fact that many African banks have seen their Outlooks stabilise after being downgraded amid the pandemic.
Negative Outlooks/Watches were less widespread in emerging markets in Europe (40%) and the Asia-Pacific region (24%). Stable Outlooks were more common in these markets, mostly due to the prevalence of ratings-driven by our belief that banks would receive support, if needed, from a sovereign or parent institution that itself was on Stable Outlook. In addition, many banks had headroom in their Viability Ratings.
Globally, there were 29 bank downgrades and nine upgrades in 2H20. Downgrades were concentrated in the Middle East and Africa (18; all but one linked to sovereign downgrades), followed by Latin America and Western Europe. The upgrades were linked to the Argentina and Ecuador sovereign upgrades following their sovereign debt restructurings.