S&P: Report poses a $2tr question about bank credit losses
The Covid-19 pandemic and responses to it will weigh heavily on bank asset quality for years to come, S&P Global Ratings said in a report published today, “The $2 Trillion Question: What’s On The Horizon For Bank Credit Losses.”
“For banks across the globe, we forecast credit losses of about $2.1tr for 2020 and 2021, spurred by the pandemic, with $1.3tr for this year–more than double the 2019 level,” S&P Global Ratings credit analyst Osman Sattar said:
“We expect preprovision earnings over the period will be able to absorb these increases, though further upticks would weigh on banks’ ratings; inevitably, some banks will incur net operating losses.
“In line with our economists’ forecasts of a broad, strong economic recovery into 2021, we expect losses in that year will fall back to a more manageable $0.8tr–though this would still be more than one-third above the 2019 level. Indeed, we expect that 2019 marked the end of a multiyear period of benign credit losses for banks globally.
“While around 60% of the forecast credit losses will arise in Asia-Pacific, the highest relative increases–more than double on average compared with 2019–will occur in North America and Western Europe.
“The duration and severity of the global downturn and the strength of the recovery will shape bank asset quality, and key drivers and differentiators will be effective fiscal support from governments to their economies, as well as banks’ forbearance measures and financial reporting transparency.
“Our forecasts are based on our analysts’ estimates for nonperforming loans and related provisioning. Regulatory forbearance, jurisdiction-specific rules, or bank management decisions regarding slowing the pace of loss recognition, will affect the timing and recognition of credit losses in banks’ financial reporting.
“As the aftermath of the 2008-2009 financial crisis showed, delays in the recognition of credit losses by banks, or a lack of transparency in reporting such losses, could undermine investor confidence in banks and may delay the path to recovery for some countries,” Mr. Sattar said.
This report does not constitute a rating action.
