The trend seems set to worsen, as a net 11% of financial institution ratings outlooks were negative at end-2016.
The proportion of ‘A-‘ and higher ratings in Fitch’s global portfolio of sovereigns, corporates and banks remains well below the pre financial-crisis level and could fall further over the next couple of years as the balance of ratings outlooks has deteriorated, Fitch Ratings says.
“Our sovereign portfolio has recorded some of the biggest moves, with the proportion of ‘AAA’ sovereigns dropping to 10% at the end of 2016, its lowest-ever level. Around 36% of the portfolio is rated in the ‘A’ to ‘AAA’ categories, down from 48% at the end of 2006 while 27% is rated ‘B+’ or below, compared to 20% in 2006” Fitch analysts said.
The fall in the number of high investment grade ratings largely reflects the lingering effects of the global financial crisis, when government debt in several advanced economies increased significantly. We believe high government debt levels will persist for some time based on growth, interest rate and primary balance projections.
“Our sovereign ratings also have the greatest share of negative outlooks on a net basis, at 21%. This suggests downgrades could outnumber upgrades by a wide margin. Pressures include a stronger US dollar, which is challenging for many emerging-market borrowers. Rising trade protectionism and economic nationalism could also hurt growth and boost inflation” Fitch analysts said.
The proportion of corporate ratings in the ‘A’ to ‘AAA’ categories has dropped to 20% from 30% over the last decade, but unlike sovereigns the proportion rated ‘B+’ and below has only ticked up by 1 percentage point. Instead ratings have become increasingly compressed in the ‘BB’ and ‘BBB’ categories.
The downward shift reflects a mix of longer term and cyclical trends, as well as a willingness by companies to run at higher debt levels in an era of historically low borrowing costs. Longer term, utilities and telecoms have been affected by changes in the energy mix and technology landscape. While these trends have stabilised, they show no evidence of reversing.
For other sectors such as autos and natural resources there is more potential for ratings to rise. Autos are well on the path to recovery after severe weakness around the time of the global financial crisis. Oil, iron ore and steel companies are beginning to see slow improvement as rising demand and rationalisation reduces commodity overcapacity.
Financial institutions, which have historically had a bigger share of high investment grade ratings, have seen the proportion of ‘A’ to ‘AAA’ category rating slip to 39% from 53%. While ratings overall remain below pre-crisis levels, many financial institutions’ credit profiles have strengthened since the end of 2013 as banks increase capital and liquidity buffers to meet tougher standards. However, low interest rates and reduced sovereign support have also had a negative impact.
The trend seems set to worsen, as a net 11% of financial institution ratings outlooks were negative at end-2016, driven largely by outlooks on emerging-market banks, which themselves often reflect the outlooks of their sovereign.