Covid effect on bank asset quality less uncertain now, says S&P

In turn, the effects of the pandemic on banks’ asset quality are becoming a little less uncertain and a little less negative compared to our February 2021 forecasts, it said.

“We forecast that credit losses across the world’s banking systems will amount to around $1.6 trillion in 2021-2022, about 8% lower than our previous forecast of $1.8 trillion,” said Osman Sattar, credit analyst at S&P Global Ratings.

“Banks are increasingly in a better position to absorb these losses from earnings rather than from a depletion of capital.”

Still, its forecast for credit losses across the three years to end-2022 amounts to around $2.5 trillion in aggregate–more than 1.5 times the run rate of losses in 2019. The rating agency expects that 2019 marked the end of a multiyear period of benign credit losses for banks globally, even as economies continue to recover from the pandemic.

It now believes that North American and Latin American banking systems to return to pre-pandemic (2019) loss levels by end-2021 and 2022, respectively, reflecting their earlier recognition of losses, as well the positive effects on asset quality from the strong economic recovery underway.

“We have revised down our credit loss forecasts for banking systems in Asia-Pacific (excluding China), as well as in Europe, the Middle East, and Africa, reflecting the global economic recovery. Unlike in the Americas, however, we do not expect a return to more benign pre-pandemic credit losses over 2021-2022,” it said.

In contrast, for China, S&P’s revised credit loss forecasts are marginally higher, by around 2%, as it anticipates that the pandemic’s effect on China’s credit costs may persist over a longer period.

“A key risk to our base-case scenario is that slow and uneven vaccine rollouts and surges in infections of more contagious covid-19 variants reverse or slow the economic recovery, with negative consequences for bank asset quality. Moreover, even as the economic recovery continues, the end of government fiscal-support schemes and bank loan moratoria may unmask fragilities in banks’ asset quality, with possible idiosyncratic effects on some banks,” the rating agency said.

The latest data for 2020 show that bank credit losses amounted to around $820 billion, some 8% lower than our previous forecast of $892 billion.