In DBRS Morningstar's view there are two crucial elements that will ultimately determine the extent to which the Coronavirus Disease (COVID-19) pandemic affects the credit profile of banks worldwide.

The unprecedented economic impact resulting from the shutdown of economies.

There is still enormous uncertainty around the size and duration of the GDP contraction in individual economies, the rise in unemployment and corporate insolvencies, but these will all adversely affect banks’ asset quality, earnings and capital.

 

The similarly unprecedented scale of government and central bank support and intervention.

The details and implementation of many of these packages are still being finalized, but they will mitigate some of the impact of the economic shutdown, reducing pressure on banks. Many of the measures directly involve the banking sector and confirm the importance of the role banks are being asked to play in ensuring individuals and corporates can eventually recover from this shutdown and that credit continues to flow through to the economy.

 

How Will These Factors Affect Bank Creditworthiness?

In assessing how the factors above affect individual bank ratings across Europe, North America and Asia Pacific, DBRS Morningstar is focusing on their impact on the banks’ individual building blocks, as per the Global Methodology for Rating Banks and Banking Organisations. In the short-term, our main focus will be on the Liquidity & Funding, and Risk Profile building blocks, and how banks are managing the immediate pressures they face from the disruption in the real economy and financial markets. Looking beyond that there will be greater emphasis on the Earnings and Capital building block, and banks’ ability to restore any deterioration within a reasonable time period. We expect most banks to maintain their Franchise positions, given the important role they will be playing in the economy, unless they fail to meet customers’ needs and expectations in this challenging period.

Overall, we see that banks are better positioned now than they were heading into the global financial crisis. Generally, they have higher capital ratios, stronger liquidity and healthier funding profiles. Risk management processes have also been enhanced. Additionally, central banks and banking regulators have shown they are better prepared to take swift action. However, some banks were still in the process of completing the reduction of high levels of non-performing loans (NPLs), and that progress will now be reversed. Many banks were also part way through implementing restructuring and cost efficiency programmes to offset weak profitability, and that progress will also be halted.

 

Potential Impact on Bank Ratings

Initially, we would expect to see downward rating pressure for banks that are weakest in their rating category. More negative trends are likely to be put on ratings, and in some cases, there could be rating downgrades. These could be for banks that are still burdened with higher levels of non-performing loans and weak profitability or banks that have not completed essential restructuring programmes. Given the important role that large banks are playing in supporting economies, we see their position as generally more secure. Some small and medium-sized banks could be more vulnerable, particularly if they have outsized lending to sectors in the economy that struggle to recover in due course, or are geographically concentrated in regions harder hit by the coronavirus.

Over time, if we see that the governments are pushing some of the risks that they are currently shouldering back onto the banks or regulators begin pressuring banks to rebuild capital before profitability has recovered, or if the economic contraction shows signs of continuing well into the second half of the year, then we could see a broader swathe of downward rating pressure, as banks become structurally less profitable and less able to recover from the pressures they will face. For banks that were experiencing positive rating pressure, this adverse environment is likely to offset that pressure and put any positive actions on hold.

 

Press release by DBRS Morningstar


Publié le 27 mars 2020