banks in emerging markets mohamed damak cynthia cohen freue ivan …€¦ · 26-05-2020 · ivan...
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May 26, 2020
Mohamed DamakCynthia Cohen FreueGeeta ChughNatalia YalovskayaMing Tan
Banks in Emerging Markets15 Countries, Three COVID-19 Shocks
Ivan TanSergio GaribianTatiana LysenkoElijah Oliveros Rosen
Key Takeaways
– About one-third of banks we rate in emerging markets now have a negative outlook following several rating actions and Banking Industry Country Risk Assessment changes in recent weeks reflecting the shift in their operating environment as a result of the COVID-19 pandemic.
– We see three channels through which COVID-19 could affect EM banks: deteriorating asset quality; heavy dependence on external funding; or, third, a lack of government capacity to extend support, weaker governance, or heightened likelihood of political or social tensions.
– The current shock will affect profitability rather than capital. Profitability in most EM bank systems will decline in 2020 on higher cost of risk and weaker interest revenues.
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Emerging Markets’ Real GDP Growth
EM Economies | 2020 Will Be The Worst In Decades
3
Note: The average GDP aggregates are based on PPP GDP weights of selected major key EM economies covered in this report. EM--Emerging markets. Sources: Oxford Economics, S&P Global Ratings’ forecasts.
– We forecast EM GDP will contract in 2020.
– The recovery will be uneven, depending crucially on policy responses to help limit economic dislocation.
– Risks are on the downside.
-6
-4
-2
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020f
%
LATAM EM
EMEA EM
Asia EM
EM excl. China
Emerging Markets Banking Industry Country Risk Assessment (BICRAs) as of May 22, 2020
EM Banks | Three Channels Of COVID-19 Shock
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BICRA--Banking industry country risk assessment. N--Negative. P--Positive. S--Stable. Source: S&P Global Ratings.
We see three main ways the COVID-19 shock may harm EM banks' creditworthiness:
– Deteriorating asset quality deterioration due to lower economic growth and concentration of EM economies on specific sectors such as hospitality or industrial or service exports to developed countries or commodities such as oil or gas.
– Heavy reliance on external funding amid changing investor sentiment toward some EMs.
– Lack of government capacity to provide extraordinary support, weaker governance, and a higher likelihood of political and social tensions.
CountryBICRA group
Economic resilience
Economic imbalances
Credit risk in the economy
Economic risk
Institutional framework
Competitive dynamics
Systemwide funding
Industry risk
Argentina 9 Extremely high High Extremely high 10/S High High Very high 7/N
Brazil 6 Very high Intermediate High 7/S Intermediate High Intermediate 5/S
Chile 3 High Low Intermediate 4/N Low Intermediate Low 3/S
China 6 Intermediate High Very high 7/S High High Very low 5/S
Colombia 6 High High High 7/S High Intermediate Intermediate 5/P
India 5 High Low Very high 6/N High High Low 5/S
Indonesia 6 High Low Very high 6/N High High Intermediate 6/S
Malaysia 4 High Low High 5/S Intermediate Intermediate Low 3/S
Mexico 5 Very high Very low High 6/S Intermediate Intermediate Low 3/S
Philippines 5 Very high Low High 6/S High Intermediate Intermediate 5/S
Poland 4 High Low Intermediate 4/N Intermediate High Intermediate 5/N
Russia 8 Very high High Very high 8/S Very high High High 7/S
Saudi Arabia 4 High Intermediate Intermediate 5/S Intermediate Intermediate Low 3/S
South Africa 6 Very high High High 7/N Intermediate Intermediate High 5/S
Turkey 9 High Very high Very high 8/N Very high Very high Very high 9/N
Asset Quality Indicators Will DeteriorateNPLs as a percentage of total loans, 2016-2021f
EM Banks | Asset Quality Will Deteriorate
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f--Forecast. NPL--nonperforming loan. Source: S&P Global Ratings.
– We expect asset quality to deteriorate across the board, with NPLs increasing by more than 50% on average and potentially doubling in some countries. Factor to watch: Regulatory forbearance on classification that would delay the recognition of the problems.
– Banks with high exposure to SMEs, real estate lending, unsecured retail, or large corporates with open FX positions would be the most affected.
02468
101214161820
%
And Credit Losses Will Increase in 2020-2021
EM Banks | Credit Losses Will Increase
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Note: Data for Argentina, Brazil, Chile, Colombia, and Mexico include net charge-offs. f--Forecast. Source: S&P Global Ratings.
– While credit losses will increase, we think regulatory forbearance may delay their recognition and push some of the increase into 2021.
– Measures implemented by most central banks in the regions are helpful, but generally do not reduce credit risk on banks' balance sheets.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
%
2016
2017
2018
2019
2020f
2021f
Profitability Will DeteriorateReturn on assets
But Banks Enjoy Strong Interest MarginsNet interest income to average earning assets
EM Banks | A Profitability, Not A Capital Event
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f--Forecast. Source: S&P Global Ratings. Source: S&P Global Ratings.
– Profitability will decline due higher cost of risk and, for some systems, lower interest margins. But we expect banks to remain profitable in 2020, except for those banks in India that are already grappling with a significant backlog of NPLs that will be aggravated by the current shock.
– EMs banks remain much more profitable than developed market banks due to hefty interest margins and good efficiency (in most countries, labor costs remain lower).
0
2
4
6
8
10
12
14
16
%
2016 2017 2018 2019
(1)
0
1
2
3
4
5
6
%
Argentina
Brazil
Chile
China
Colombia
India
Indonesia
Malaysia
Mexico
Philippines
Poland
Russia
Saudi Arabia
South Africa
Turkey
EM Banks | External Funding Is A Source Of Risk For Some Systems
0
20
40
60
80
100
120
140ArgentinaChinaMexicoPhilippinesRussiaSaudi ArabiaSouth AfricaBrazilChileColombiaIndiaIndonesiaMalaysiaPolandTurkey
8
Source: S&P Global Ratings. Source: S&P Global Ratings.
– EM banks fund their lending portfolios mainly through core customer deposits, sometimes supplemented with domestic capital markets. They are therefore either in net external asset position or have limited net external debt.
– Turkey is the exception. Its significant external debt, typically short term, exposes the banking system to roll-over risks. So far, banks have been able to roll a large portion of maturing debt. They also have some foreign currency denominated liquidity (a large portion of it is placed with the CBT).
Customer Deposits Dominate Funding ProfileCore customers deposits / systemwide loans
And Reliance On External Debt Is LimitedNet external debt / systemwide loans
(20)
(15)
(10)
(5)
0
5
10
15
20
25
30
%
2016 2017 2018 2019
– We recently revised our BICRA "economic Risk trend" to negative on Chile, India, Indonesia, and Poland. We revised the Economic Risk score on Mexico (to '6' from '5') and on South Africa ('7' from '6'). We revised the "Industry Risk" trend on Turkey to negative.
– Following in several rating actions on EM banks over the past weeks, and the risks remain tilted to the downside.
The Outlook Bias Is Turning Negative As of May 22, 2020
EM Banks | Risks Are Tilted To The Downside
Negative32%
Stable67%
Positive1%
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Source: S&P Global Ratings Source: S&P Global Ratings,
0% negative 1% to <32%
33% to <66%
67% to <99%
100% negative
Malaysia Brazil Colombia Mexico Argentina
Philippines China India Poland Chile
Saudi Arabia Russia Indonesia
South Africa Turkey
EMs Government Support Assessment (As of May 22, 2020)
EM Banks | Government Support Mitigates Risks
Country Government Support Assessment FC Sovereign RatingsChina Highly supportive A+/Stable/A-1
India Highly supportive BBB-/Stable/A-3
Indonesia Highly supportive BBB/Negative/A-2
Malaysia Highly supportive A-/Stable/A-2
Philippines Highly supportive BBB+/Stable/A-2
Saudi Arabia Highly supportive A-/Stable/A-2
Brazil Supportive BB-/Stable/B
Chile Supportive A+/Negative/A-1
Colombia Supportive BBB-/Negative/A-3
Mexico Supportive BBB/Negative/A-2
Russia Supportive BBB-/Stable/A-3
Argentina Uncertain SD/--/SD
Poland Uncertain A-/Stable/A-2
South Africa Uncertain BB-/Stable/B
Turkey Uncertain B+/Stable/B
10
Source: S&P Global Ratings
– We assess some countries as highly supportive and expect they would provide support to systemically important banks, if needed.
– Some jurisdictions are making progress to enhance their regulatory toolkits, but policymakers are cautious about eliminating possible extraordinary government support.
Contact List
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Mohamed Damak
Senior Director
+ 971-43-72-71-53
Natalia Yalovskaya
Director
+ 44-20- 7176-3407
Sergio GaribianSenior Director – Analytical Manager
+55-11-3039 9749
Cynthia Cohen Freue
Senior Director
+ 54-11-48912161
Ming Tan
Director
+852-2532-8074
Tatiana Lysenko
Senior Economist
+33-14-420-6748
Geeta Chugh
Senior Director
+ 91-22-33-421-910
Ivan Tan
Director
+65-6239-6335
Elijah Oliveros Rosen
Senior Economist
+1-212-438-2228
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