War, Stagflation risks to FIs are concentrated in emerging markets: Fitch

April 5, 2022 (MLN): The risks to global financial institutions’ (FI) credit profiles from a stagflation scenario associated with the Russia-Ukraine war are concentrated in emerging markets (EMs) and driven by sovereign linkages, Fitch Ratings says in a new report issued yesterday.

Fitch has assessed the rating vulnerability of various FI sub-sectors to a plausible adverse scenario, whereby inflation jumps significantly and the global economy slows sharply. Aside from global aircraft lessors, FIs in certain EMs would face the highest risks of negative rating actions, in most cases driven by sovereign rating actions. Sovereign actions would affect Issuer Default Ratings that are driven by sovereign support, or capped by the Country Ceiling or sovereign rating.

However, Fitch expects that most FI sub-sectors would only face a few rating changes, including some Outlook revisions. Most FI ratings have sufficient headroom under the scenario, with solvency and liquidity likely to remain strong. In most jurisdictions, we would not expect operating environments to be materially affected.

For banks, the main impact would be in some European EMs, reflecting sensitivity to the direct effects of the scenario and the conflict, and the likelihood of sovereign rating changes.

For non-bank financial institutions, aircraft lessors would be affected globally due to higher fuel and ticket prices, lower passenger numbers and higher impairments. Lessors could face significant losses from aircraft stranded in Russia to the extent that these are not covered by insurance.

For insurers, increased claims costs due to higher inflation and asset-quality pressure due to the economic slowdown would be mitigated by higher interest rates.

For fund ratings, the impact would be limited as Fitch-rated funds typically have strong liquidity and sufficient ability to absorb a degree of credit deterioration or market value declines in underlying holdings.

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