Positive fundamentals in the banking sector continue to be challenged by below-trend economic growth and low or negative interest rates in core markets.
In its ‘Financial Institutions 2017 Outlooks Compendium’, Fitch Ratings highlights that positive fundamentals in the banking sector continue to be challenged by below-trend economic growth and low or negative interest rates in core markets. Weak growth exerts pressure on the quality of legacy assets while dampening demand for new credit. Low or negative rates make it more difficult to manage net interest margins, squeezing profits.
“The ongoing impact of conduct risk penalties for certain entities, political uncertainty, regulatory changes, and country-specific or idiosyncratic event risks are likely to challenge banks globally in 2017,” said David Weinfurter, Global Group Head of Financial Institutions at Fitch.
With a few notable exceptions, banks and banking systems around the world are now materially less risky, with consistently improved credit fundamentals. However, macro-economic factors, enhanced regulation, legacy issues and business model dynamics have made delivering returns on equity that exceed the cost of equity far more challenging.
2017 bank rating Outlooks diverge for developed and emerging markets. In the developed markets the distribution of Outlooks is 80% Stable, 8% Positive, and 12% Negative at 1 January 2017. In the emerging markets the Outlook distributions were 68% Stable, 2% Positive, and 30% Negative as of the same date. In addition, there have already been notable emerging-market bank downgrades in 2017, for example in Costa Rica and Turkey, triggered by sovereign downgrades, with Outlooks now Stable.