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Global banks 2019 outlook: Bracing for more volatility

By: S&P Global Ratings

Key Takeaways

1-We expect banks to face more market volatility in 2019 from policy uncertainty and the rollback of monetary easing.

2-The credit cycle will turn sooner or later, putting the spotlight on the imbalances that have built up in some developed and emerging markets, even if improved balance sheet soundness in many banking systems should moderate the impact.

3-The monetary policy shift could lead to an abrupt repricing of risks in financial markets and a correction in some housing markets (for example, Canada, Australia, China, Hong Kong, and New Zealand).

4-Credit conditions remain broadly supportive for banks, but the threats posed by monetary policy normalization, trade tensions, and ongoing political risk are dragging down investor confidence and weakening economic momentum.

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5-Our assessment of recession risk in 2019 for the U.S. stands at 15%-20%. While credit conditions are generally satisfactory, we are watchful for any sign of rising problems in some segments (auto, credit card, commercial real estate, and leveraged loans).

6-The economic momentum in Europe is weakening. Banks should be able to maintain sound balance sheets but will struggle to increase revenues and improve efficiency.

7-The risk of a disruptive Brexit remains significant. British banks are the most vulnerable to the fallout, which would most likely lead to the U.K. economy contracting amid a domestic political crisis, leaving the property market and asset quality vulnerable.

8-Concerns about fiscal sustainability in Italy could undermine confidence further, translate into higher borrowing costs, and constrain banks’ progress.

9-The climb in the U.S. dollar continues to stoke emerging market turbulence that could spread beyond Argentina and Turkey to other vulnerable countries. Capital flows to emerging markets are likely to remain under pressure in 2019.

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GCC Banks: Geopolitical risk or oil prices could destabilize outlook

GCC (Gulf Cooperation Council) banks’ financial profiles should remain stable in 2019, absent any unexpected geopolitical shock. However, the recent drop in oil prices does not bode well for these banking sectors.

Bank lending growth should stabilize at around 5% in 2019, as stronger public investments raise economic growth in the region overall.

We expect profitability to stabilize with a return on assets at about 1.6% and a net interest margin at 3% in 2018 benefitting from the higher interest rates and significant non-interest-bearing deposits.

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International operations could create risks for some GCC banks.

A few banks with exposure to Turkey will see some impact on their asset quality.

Three-quarters of the 24 GCC rated banks carry a stable outlook.

Negative outlooks are concentrated in Qatar and on a few banks in other GCC countries due to higher risk in their international operations.

The average GCC bank rating is ‘BBB+’.