(Editor’s Note: This commentary is an update of the article “How COVID-19 Is Affecting Bank Ratings,” published on May 7, 2020. It includes updates on our latest rating actions and publications.)
Banks across the world are facing negative rating momentum as a result of the significant effects of the coronavirus pandemic, oil shock, and market volatility. Yet, we still anticipate bank ratings will stay largely resilient for four key reasons:
- The generally strong capital and liquidity position of banks globally at the onset of the pandemic, supported by a material strengthening in bank regulations over the past 10 years;
- The substantial support and flexibility that banking systems receive from public authorities to entice them to continue lending to households and corporates, whether in the form of liquidity or credit guarantees, and relief on minimum regulatory capital and liquidity requirements;
- The unprecedented direct support that governments provide to their corporate and household sectors; and
- The likelihood, in our base-case scenario, of a 5.9% rebound in global GDP in 2021 after a sharp contraction by 2.4% this year, even if this contraction and ensuing recovery varies considerably between countries.
Our outlook on banks has turned sharply more negative since late April. This reflected the revision of our macroeconomic forecasts, in which our economists materially worsened their assumptions for GDP contraction this year (see table 1). We now assume a more gradual recovery in many countries, with continued downside risk to this base-case scenario (see “Global Credit Conditions: Rising Credit Pressures Amid Deeper Recession, Uncertain Recovery,” published April 22, 2020, on RatingsDirect).
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Across the regions, public authorities view their banking systems as a conduit for economic and monetary policies, aiming to reduce the immediate impact of the economic stop associated with measures to contain the coronavirus. They have implemented a broad array of measures to incentivize banks to continue lending and show flexibility toward struggling customers. In return, banking systems are receiving massive liquidity support, and regulations are being relaxed temporarily (see “Bank Regulatory Buffers Face Their First Usability Test,” published June 11, 2020). Nevertheless, some governments…