The path to recovery will be more painful for emerging markets such as India and the banks' recovery to long-term averages for key asset quality and profitability ratios will take years, S&P Global Ratings said.
India, Mexico, and South Africa are among the banking systems that will be slower to recover to 2019 levels--likely beyond 2023, according to S&P Global Ratings.
Covid-19 and the oil price shock of 2020 are taking a heavy toll on global banks. "S&P Global Ratings has taken 335 negative rating actions globally since the outbreak began, and we anticipate it will be difficult for the financial strength ratings on financial institutions to return to pre-crisis levels. We don't expect the world's largest banking sectors, including more than half of G20's, to recover to pre-Covid-19 levels until 2023, or beyond," the agency said.
The recovery for some other jurisdictions will likely be much further out. For India, Mexico and South Africa, a recovery to pre-Covid-19 levels may not arrive until after 2023.
India, among these late-exiter banking jurisdictions are those jurisdictions where Covid-19 and other stresses have already had a meaningful negative effect.
S&P has already made negative revisions on our BICRAs in these jurisdictions, and on our ratings on banks and NBFIs.
"We have taken negative rating actions on Indian banks and NBFIs as operating conditions have deteriorated through the crisis. The country entered the pandemic with an overhang of high nonperforming assets," S&P said.
S&P anticipates there will be much uncertainty on the recovery pathway. Banking sector recovery will not just depend on the economic recovery occurring broadly in accordance with the base case, but also on the nature and extent of the economic damage affecting firms and households prior to the onset of the economic recovery, and the extent to which this will hit banks.
"Already, we forecast credit losses of about $2.1 trillion for 2020 and 2021 for the global banking sector, spurred by the pandemic," it said.
The hit on financial institutions globally has been unambiguously negative. "Our negative rating actions since March 1, 2020, to September 7, 2020, include 234 rating actions on banks and 101 rating actions on nonbank financial institutions (NBFIs). Most rating changes are outlook revisions (236, or 70 per cent of total rating actions). Rating downgrades and negative CreditWatch placements account for the remainder," the agency said.
S&P has already negatively revised the economic or industry trends underpinning the financial strength of many banking jurisdictions globally. This trend should persist.
Further, it said that there is negative rating momentum affecting financial institutions in most major banking jurisdictions, indicating that downside risks are to the fore. Even for less-affected banking jurisdictions, recovery to pre-Covid-19 levels will unlikely come before end-2022. These jurisdictions include China, Canada, Singapore, Hong Kong, South Korea and Saudi Arabia. Risks remain firmly on the downside for these banking jurisdictions.
S&P has made negative revisions for 42 of our 88 Banking Industry Country Risk Assessments (BICRAs) since the onset of the crisis, including on on views of economic and industry trends.
"Even for those jurisdictions that have been more resilient, our outlook for banking sector credit metrics as well as metrics applicable to individual banks are uniformly weaker," it said.
To estimate the shape of recovery for banks, S&P Global Ratings has analyzed 20 of the largest banking systems globally.
The base case assumes that a vaccine is not available until about mid-2021. The base case considers the ongoing effects of the pandemic, the oil price shock, and other market stresses on our BICRAs and bank ratings. These 20 banking jurisdictions are segmented into three groups: early-exiters, mid-exiters, and late-exiters.
Financial institutions across these 20 jurisdictions accounted for 195 rating actions of the 335 negative rating actions globally affecting financial institutions as of September 7.
Many banking jurisdictions will only recover in 2023 or beyond. Early-exiter jurisdictions include those where there has been no hit on the BICRAs to date and limited effect on financial institutions ratings. For these jurisdictions we estimate that recovery to pre-Covid-19 status is nearest. Late-exiter banking jurisdictions include those where BICRAs have already been negatively adjusted, post-Covid-19. For these jurisdictions we view the recovery to pre-Covid-19 levels as furthest away.