Global banks claw their way back to normalcy
The global banking sector is clawing its way back to normalcy. thanks to authorities' strong support for households and corporates during the pandemic, according to a report by S&P Global.
The credit ratings agency said part of the reason was that lenders were in good shape going into the pandemic after banks bolstered their capital, provisioning, funding, and liquidity buffers in the wake of the global financial crisis.
S&P expects normalisation to be the dominant theme of the next 12 months, as rebounding economies, vaccinations, and state measures help banks bounce back much more quickly than was conceivable in the dark days of 2020.
"We see less downside risk for banks as economies rebound, vaccinations kick in, and banks feel the stabilising effects of state intervention," said S&P credit analyst Gavin Gunning.
"With no vaccine in October 2020, we believed at the time that 2021 could be a very difficult year for banks. State intervention on behalf of corporates and households--including significant fiscal and monetary policy support--is working and banks have benefited," said Gunning.
The agency’s negative outlook for the global banking sector improved to 1 percent in June 2021 from 31percent in October 2020. As of June 25, 2021, about 13 percent of bank outlooks were negative. This is significantly lower than October 2020 when about one-third of rating outlooks on banks were negative.
“Our base case is that the global banking sector will continue to slowly stabilise as the economic rebound gains momentum and as support is gradually withdrawn. Should a re-intensification of risks occur, this would require more support from public authorities for the real economy.”
“For 11 of the top 20 banking jurisdictions, we estimate that a return to pre-Covid levels of financial strength won't occur until 2023 or beyond. For the other nine, we estimate that recovery may occur by year-end 2022.”
As this recovery unfolds, S&P is watching five key risks. These include: slow vaccination rollouts and new variants that may disrupt economies; a surge in leverage and high levels of corporate insolvency may strain banks and a disorderly reflation and market disruption could hurt borrowers, and banks.
Additionally, the ratings agency said low rates may continue to challenge banks' business models and property risks may yet intensify, adding to banks' problem loans.
"There is an inevitable lag effect on banks' credit profiles as borrowers recover from the pandemic," said S&P
"While bank profitability will unquestionably remain muted in the continuing ultra-low interest rate environment, lenders are better capitalised, more liquid, and less leveraged compared with where they were in 2009, the last period of significant global banking strains."
Funding profile improves but some risks ahead
As for Australia, the S&P analysts noted that the banking system's funding profile has improved over the past 10 years on the back of growing customer deposits and falling offshore borrowings. The stronger systemwide funding metrics are sustainable; this is despite a likely modest weakening in the next three years as the Covid-driven rise in customer deposits unwinds and the central bank's term-funding facility matures.
Further, credit losses are trending lower. We believe bank credit losses peaked in 2020, following the damage inflicted by the pandemic. In our view, credit losses in the next two years should remain well below our expected long-term average and will trend toward pre-Covid levels.
Looking ahead, S&P said rising risks could lead to a reintroduction of macro-prudential measures. National house prices have risen by about 10 percent in fiscal 2021
“We believe further appreciation will be supported by record-low interest rates, supply constraints, and migration returning when borders potentially reopen in fiscal 2023.
"In our view, the council of financial regulators will keep a close eye on risks to financial stability stemming from a combination of strong house prices and high household debt. They will also monitor for any erosion in lending standards. Should risks continue to increase, regulators would likely reintroduce macro-prudential measures.”