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The Global Banking Sector Faces Tougher Tests Ahead, Report Says : S&P

Jul 21, 2022 06:00 am

The global banking sector is bracing for tougher tests as economic growth weakens and higher-for-longer inflation affects borrowers.

"The optimism at the start of 2022 is evaporating," said S&P Global Ratings credit analyst Gavin Gunning.

"For major economies, S&P Global Ratings has lowered its economic forecasts four times since the onset of the Russia-Ukraine conflict. The growth outlook for 2022 is now much weaker compared with expectations six months ago, and with 2021."

Inflation is taking center stage in many jurisdictions and muting the post-COVID rebound. The challenge for central banks is whether they can harness inflation expectations without causing a recession.

For most banks the immediate effect of higher interest rates is positive because it will benefit their net interest income.

"The compounding effects on banks from weaker growth and higher interest rates over the next six to 18 months are much less certain; they could be profound in a downside scenario," said Mr. Gunning.

Under base-case conditions, the corporate sector appears relatively resilient in a moderate stress environment.

The outlook for banks is nuanced across regions.

  • In the U.S., the Fed is hiking rates and the economic growth outlook 2023-2025 is a bit weaker. U.S. banks should maintain solid balance sheets, however. The Fed's annual bank stress test shows banks continue to have strong capital levels.

  • For European banks, the Russia-Ukraine conflict bears downside risks to our ratings.

  • In Asia-Pacific, 2022 GDP growth was revised down recently by 0.4% to 4.2%, mainly driven by China. Most Asia-Pacific bank outlooks are stable, however; and in most jurisdictions, banks have some buffers to contend with the overall weaker outlook, including highly rated China banks.

  • In Latin America, the likely weaker economic performance over the next two years and lower credit growth will push up nonperforming loans.

"The significant build-up of capital and other buffers over the past decade will allow the global banking sector to show some resilience at current rating levels," said S&P Global Ratings credit analyst Alexandre Birry.

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