April 30, 2021 (MLN): One in every five rating actions that Fitch Ratings took on global financial institutions (FIs) in 1Q21 led to a rating Outlook revision to Stable from Negative, signaling that near-term ratings risks are easing.
However, downside risks remain, including potential further coronavirus waves, weakened sovereign credit profiles and an economic fallout as governments gradually withdraw pandemic-related economic support.
Of the 317 rating actions taken on global FIs between 1 January and 31 March 2021, 66% led to unchanged ratings and Outlooks, while 20% led to Outlook revisions to Stable from Negative. Only 11% of rating actions were negative, evenly split between downgrades and Outlook revisions to Negative.
Global rating agency Fitch in its latest report on ‘Global Financial Institutions Ratings Update 1Q21’, said that the banks had the highest proportion of negative rating actions in 1Q21, reflecting sovereign rating actions and weakening standalone credit profiles. Non-bank financial institutions (NBFI) downgrades reflected a mix of downgrades of corporate parents, sovereigns, standalone credit weaknesses and M&A.
The proportion of global FI ratings on Negative Outlook or Watch continues to decline but remains high by historical standards despite the mitigating macroeconomic effects of fiscal and monetary stimulus, with 54% of bank ratings, 33% of NBFI ratings and 24% of insurance ratings on Negative Outlook or Watch at end-1Q21.
Approximately 31% (nine) of Latin-American (LatAm) rating actions were negative during 1Q21, compared to 13% (20) of Europe, Middle East and African (EMEA), 5% of North American (NA, four) and under 2% (one) of Asia-Pacific (APAC) related actions, the report added.
Fitch Ratings expects stabilization trends over the rest of 2021 to vary by region due to contrasting speeds of economic recovery and different degrees of exposure to the sectors most affected by the pandemic. Several FI ratings are sensitive to the pressure that remains on some sovereign ratings, particularly in emerging markets, and on those corporate sectors and asset classes worst affected by the pandemic, such as leisure and hospitality.
Banks
Fitch’s reviews during the first quarter resulted in no change to the rating or Outlook/Watch for 64% of the banks reviewed. Outlook revisions to Stable from Negative accounted for almost 19% of actions during this period, spread across all regions bar LatAm. Downgrades were scarce at just under 4% of ratings actions, mainly reflecting sovereign-driven actions in LatAm (Panama).
The report noted that the proportion of bank ratings on Negative Outlook or Watch at end-1Q21 were highest in LatAm (about 90%), followed by Western Europe (70%) and North America (60%). At the other end of the spectrum, Stable Outlooks dominated in EM APAC (80%), followed by Central Eastern Europe (CEE) and the Commonwealth of Independent States (CIS+), (60%).
In many jurisdictions, in view of Fitch, the rating path for bank ratings on Negative Outlook will be linked to the recovery prospects of the operating environment, the sovereign rating, or both. Operating environment trends were still negative for about 80% of banking systems at the end- 1Q21. However, some major economies are now recovering well.
In the “Fitch 20” major economies, China stands out as an economy where Fitch operating environment assessment could improve. After end-1Q21, improved economic prospects for the US and Australia led to a revision of the four large Australian banks’ Outlooks to Stable from Negative and contributed to a stabilization of the Outlooks of two of the US global trading and universal banks (JP Morgan Chase and Goldman Sachs) not already on Stable Outlook.
NBFIs
The report stated that the negative rating activity of NBFIs continued to decline during the quarter, with positive rating actions significantly outweighing negative actions. Significant government stimulus has supported the economy and to some extent personal incomes, which in turn has reduced the likelihood of Fitch’s downside scenarios materializing. This stabilization in market conditions has had a material positive effect on NBFIs, which might have otherwise faced elevated funding risks.
In aggregate, almost 65% of Outlooks on NBFI issuers at the end of 1Q21 were Stable. This reflected Fitch’s view that these issuers have sufficient headroom relative to assigned ratings, even in downside scenarios, or benefit from stable sources of institutional or sovereign support.
At end-March 2021, 90% of IDRs for the 16 NBFI LatAm-based groups Fitch rates were associated with a Negative Outlook or Negative Watch, highlighting the possibility of further negative rating actions for issuers located in the region. This compares to 40% within EMEA, and 20% within North America and APAC.
Insurance
Of the 55 reviews taken on the insurance portfolio during this period, the report highlighted that the majority (40) led to no changes to the IFS/IDR or Outlooks, with the remainder mostly skewed towards Outlook revisions to Stable (from Negative) across all regions bar LatAm.
The initial set of asset stress assumptions in the wake of the virus outbreak in 1Q20 led to a range of negative ratings actions for the insurance portfolio, primarily movements from Stable to Negative Outlook. However, more recently, an update of these assumptions was performed, which led to a reduction in Fitch expectations of bond defaults, and the removal of equity security stresses, both reflecting the quicker recovery in the global economy.
However, Fitch Ratings raised its expectations of mortality assumptions in a majority of markets, given the worse-than-expected impact of the virus from a health perspective.
Overall, the impact of Fitch's revised assumptions has been favourable to the rating actions undertaken during the last quarter.
The report said that the Stable Outlooks dominate the insurance portfolio (75%) across all regions, led by North American issuers (80% on ROS), then APAC issuers (75% on ROS), followed by the LatAm and EMEA portfolios (about 70% of ROS).
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