Global Bank Post-COVID Asset Quality Varies by Market, Govt Support

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Monday November 29, 2021 / 05:04 PM / by Fitch Ratings / Header Image Credit: Ecographics


Asset quality metrics reported by 38 major banking systems since the onset of the pandemic have varied widely, both across developed markets (DMs) and emerging markets (EMs) and relative to individual country historical averages, says Fitch Ratings. Credit quality deterioration and resulting costs have been influenced by regulation, bank forbearance and provisioning practices, the pace of economic recoveries and varying levels of government support.

Fitch expects higher future credit costs to be concentrated in jurisdictions where bank frontloading of loan impairment charges (LICs) and government support levels have lagged relative to economic shocks. Banking systems with greater frontloaded provisions should be better positioned with capital and reserves to absorb higher potential losses.

Rising economic risks at the onset of the pandemic in 2020 led many DM banks to book LICs well above long-term averages. Some have begun to reverse impairments and have released reserves, notably in the U.S. Frontloading of reserves of DMs' banking systems in the Asia-Pacific region were muted in light of milder economic shocks. European bank LICs varied widely by bank and country, with impairments likely to remain more significant for southern European countries more exposed to tourism.

For 2021, LICs have generally been below normal, with some banking systems benefiting from reversals. LICs in 2022 are expected to revert to historical averages but may be mitigated by further reserve releases for DMs, with the timing and amounts dependent upon economic recoveries. Portfolio mix and legacy issues, underwriting standards and management conservatism will also influence asset quality and impairment levels.

EM banking sectors tend to underperform DMs based on the deviation of Fitch's core asset quality ratio (impaired loans to gross loans) from the 10-year average. This is consistent with the greater impact of the pandemic on EM sovereign credit profiles and operating environments, which led to more negative EM bank rating actions.

Bank System Asset Quality Ratios vs. Ten-Year Averages 
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