S&P forecasts more banking risks this year

MANILA, Philippines - Standard & Poor’s Ratings Services (S&P) has cited four key banking risks that it believes will dominate the landscape for global banking heading into 2015.

These are: the imminent reduction in support from domestic governments in some regions, the weak economy, and – although to a lesser extent – a couple of evolving but still indeterminate financial sector regulations.

An evolving risk for 2015 is geopolitical tensions, which intensified in early 2014 and are likely to remain important for some banking sectors over the next 12 months at least.

“After the global financial crisis, many governments – particularly in mature economies – stated their intentions to reduce support for banks’ senior creditors. This is the biggest game changer for the banks we rate globally,” said Standard & Poor’s credit analyst Louise Lundberg, who coordinated the report.

The report, entitled “The 2015 Global Credit Outlook For Banks” identifies the key risks and credit trends that Standard & Poor’s has identified across the 85 global banking systems it rates around the world.

Regional summaries are also provided for the US, Western Europe, Central and Eastern Europe, the Middle East and Africa, Asia-Pacific, and Latin America.

The US and Europe are at the forefront of the reform wave, with the passage of the Dodd-Frank Act and regulators continuing to build out the single-point-of-entry framework for resolving globally systemically important banks in the US, and the EU bank recovery and resolution directive (BRRD) effective in January 2016.

By contrast, many countries in Asia-Pacific are not likely to follow the European and North American paths, although some have taken the tentative first steps toward establishing their own resolution schemes. 

“While the reduction in government support could lead to ratings downgrades for some systemically important banks, it’s possible that the additional loss-absorbing capacity that some banks have and will continue to build up through equity and subordinated capital buffers could mitigate the downward pressure,” Lundberg said.

With the exception of the US, in most regions the economy is offering scant support for banks.

This is most apparent in the eurozone where the recovery has faltered again, and S&P expects gross domestic product to grow by a meager one percent in 2015.

The Asia-Pacific region, including China, and Latin America are also seeing weaker growth and this is putting pressure on banks’ asset quality and earnings generation.

While significant progress has been made to tighten regulatory requirements on banks to reduce the risk and impact of future financial crises, a few important elements are still being formulated.

In Europe, for instance, the final rules on regulatory ring-fencing and the legal separation of activities – intended to facilitate resolvability – are still being worked on.

“In our view, how these rules are ultimately determined could have long-term implications for banks’ business models, particularly those of complex international banking groups,” Lundberg said.

Finally, geopolitical tensions are elevating risks in some parts of the world, which are affecting banks both directly and indirectly.

For example, the immediate impact of geopolitical tensions in Ukraine and Russia will have a limited impact on Russian banks, the erosion in investor confidence for the industry as a whole plus the potential of additional capital flight and weaker economic growth could be more painful in the medium term.