Credit conditions remain broadly supportive of global bank asset quality, even if economic growth slows, according to S&P Global Ratings in a series of reports published.
"Most banks globally should be able to contend with challenging credit conditions in 2020 at current rating levels," said Emmanuel Volland, a Europe-based credit analyst at S&P. "At the same time, the economic outlook is delicately poised. Key risks for banks include the potential spillover effects on asset quality from slower economic growth and a weaker outlook for corporate earnings, as well as the low interest rates that are gradually pulling down banks' profitability," he added.
"A scenario of slower economic growth--primarily driven by the U.S.-China trade and strategic confrontation--and a weaker outlook for corporate earnings may ultimately take its toll on global bank asset quality and test ratings at current levels," said Gavin Gunning, an Asia-Pacific based credit analyst at S&P Global Ratings.
"Moreover, our current expectations at this late stage of what has been an extraordinarily long credit cycle is that the negative turn we anticipate--whether in 2020 or now punted further afield following recent dovish sentiment by central banks--will be orderly. A significant and abrupt cyclical downturn affecting bank credit could cause a negative step change, in our view. While not our base case, this adverse scenario is far from implausible noting the high volume of credit working its way through and around the global banking system." Gunning noted.
The significant majority of S&P Global Ratings' outlooks on banks are stable globally, supported by low credit losses and sound capitalization. However, extremely accommodative monetary policies are enabling economic imbalances to surface.
In addition, the outlook for interest rates is gradually pulling down banks' net interest margins at a time of increasing competition from new nonbank players.
"Banks need to take strategic measures to improve efficiency as the pain will likely get worse before it gets better," said Volland. "Those less able to make structural changes will suffer more."