Banking News

Banking systems in emerging markets face deterioration in asset quality: S&P

Banking systems in emerging markets face the expected deterioration in asset quality indicators as regulatory forbearance measures are lifted while vaccine rollouts in several countries continue, S&P Global Ratings said on Wednesday.

It said there remains a high degree of uncertainty about the evolution of coronavirus pandemic and its economic effects. Widespread immunisation, which certain countries might achieve by mid-year, will help pave the way for a return to more normal levels of social and economic activity.

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“But we expect non-performing loans to continue increasing and cost of risk to stabilise at high levels as central banks start to remove regulatory forbearance measures in some of the markets where such measures were implemented and banks start recognising the full extent of asset quality deterioration.”

Like peers in developed markets, said S&P, emerging markets central banks acted swiftly through a combination of lifting some regulatory requirements (particularly for problem loans recognition) and liquidity injection to help banks cope with the severe economic contractions.

“Overall, we expect the Covid-19-related economic shock to be profitability event with those emerging markets banking systems still showing positive net results in 2020-2021. But a few banks will report losses due to their higher exposure to the hardest hit sectors,” said S&P.

“Moreover, we think that emerging markets banks profitability is likely to remain below historical levels due to lower for longer global interest rates and slower growth. We expect exposures to small and medium enterprises (SMEs) will drive asset-quality deterioration, particularly for countries like India, Turkey, South Africa, China, Indonesia, and Thailand.”

Tourism and export-oriented SMEs are more vulnerable in this challenging environment. Stress in Indian SMEs is somewhat tempered by the government’s guarantee of new loans taken by SMEs, up to 20% of their aggregate loans, thereby easing liquidity pressure for SMEs.

In Turkey, SME exposures form nearly a quarter of total loans, as of end-November 2020, but 27% of these exposures benefit from government guarantees. In India, SME exposure accounts for around 20% of total exposures at mid-2020.

In China, total exposure to SMEs is small but has risen rapidly in the past few years as the government encouraged lending to this segment. Russian banks have manageable exposure to SME-related risk since large and mid-size businesses dominate the economy, which is reflected in the banks’ lending books.

These borrowers are likely to be more financially resilient to Covid-19 fallout than small businesses.

On the other hand, S&P said central banks in developed markets are likely to keep exceptionally accommodative monetary policy. For emerging markets — with some key exceptions — this should translate into a stronger economic recovery and favourable financing conditions.

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