Global Financials Ratings Stabilisation Slows as Economic Risks Rise

Fitch Ratings’ proportion of Negative Outlooks and Watches for global financial institutions (FIs), net from Positive, was in line with pre-pandemic levels at 6% at end-June 2022, but risks are skewed to the downside amid deteriorating economic indicators, particularly in emerging markets (EMs), Fitch Ratings says in a new report.

Bank downgrades exceeded upgrades again in 2Q22, reflecting operating environment deterioration in some EMs as well as weaker profitability and capitalisation. Nevertheless, this was offset by sovereign-driven Outlook revisions to Positive from Stable (Saudi Arabia and Guatemala) and to Stable from Negative (India and Uganda).

NBFIs’ net positive actions were led by North American and European traditional investment managers and U.S. business-development companies. Rating actions on the insurance portfolio were more balanced, with negative actions concentrated in EMs more than offset by positive rating actions in developed markets.

Positive rating actions made up 15% of FI actions in 2Q22, including Outlook revisions to Stable from Negative. In contrast, negative actions comprised 8% overall actions. Fitch made 387 Long-Term Foreign-Currency Issuer Default Rating and Insurer Financial Strength rating actions in the quarter.

Inflationary pressures and tighter monetary policies from most major central banks have prompted a further deterioration in the global growth outlook. The vast majority of FI sector outlooks remain neutral, but risks are skewed to the downside, particularly in EMs, where some sovereigns face meaningful challenges to creditworthiness.

Downgrade risks are concentrated in the Middle East and Africa and notable for Turkish FIs, which remain on Negative Outlooks/Watches following bank and NBFI downgrades in late July. In contrast, the mid-July stabilisation of the Brazilian sovereign Outlook led to the Outlooks of a dozen Brazilian FIs to be revised to Stable from Negative.

Negative FI actions were triggered by profitability challenges, declining capitalisation/leverage and weakened liquidity profiles. Non-sovereign-driven positive rating actions were triggered by resilient profitability and asset quality/performance, strengthened capitalisation and lower leverage and improved company profiles.
Source: Fitch Ratings