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S&P: Banks in Emerging Markets, 15 Countries, Three COVID-19 Shocks

S&P Global Ratings have published comparisons across emerging markets from 15 Countries, including Saudi Arabia and Turkey.

About 1/3rd of banks S&P Global Ratings rate in emerging markets now have a negative outlook following several rating actions COVID-19 could affect EM banks via: deteriorating asset quality; heavy dependence on external funding; lack of government support The current shock will affect profitability rather than capital. Profitability in most EM bank systems will decline in 2020

EM Economies | 2020 Will Be The Worst In Decades 

We forecast EM GDP will contract in 2020. 

The recovery will be uneven, depending crucially on policy responses to help limit economic dislocation. 

Risks are on the downside. 

Read: Is Lebanon’s once highly touted financial sector rescuable?

EM Banks | Three Channels Of COVID-19 Shock 

We see three main ways the COVID-19 shock may harm EM banks’ creditworthiness: 

– Deteriorating asset quality deterioration due to lower economic growth and concentration of EM economies on specific sectors such as hospitality or industrial or service exports to developed countries or commodities such as oil or gas. 

– Heavy reliance on external funding amid changing investor sentiment toward some EMs. 

– Lack of government capacity to provide extraordinary support, weaker governance, and a higher likelihood of political and social tensions.

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EM Banks | Asset Quality Will Deteriorate

We expect asset quality to deteriorate across the board, with NPLs increasing by more than 50% on average and potentially doubling in some countries. 

Factor to watch: Regulatory forbearance on classification that would delay the recognition of the problems. 

– Banks with high exposure to SMEs, real estate lending, unsecured retail, or large corporates with open FX positions would be the most affected. 

EM Banks | Credit Losses Will Increase 

While credit losses will increase, we think regulatory forbearance may delay their recognition and push some of the increase into 2021. 

Measures implemented by most central banks in the regions are helpful, but generally do not reduce credit risk on banks’ balance sheets. 

Read: UAE banks among top performing in GCC, KPMG report finds

EM Banks | A Profitability, Not A Capital Event 

Profitability will decline due higher cost of risk and, for some systems, lower interest margins. But we expect banks to remain profitable in 2020, except for those banks in India that are already grappling with a significant backlog of NPLs that will be aggravated by the current shock.

EMs banks remain much more profitable than developed market banks due to hefty interest margins and good efficiency (in most countries, labor costs remain lower). 

EM Banks | External Funding Is A Source Of Risk For Some Systems 

 Global Ratings. Source: S&P Global Ratings. – EM banks fund their lending portfolios mainly through core customer deposits, sometimes supplemented with domestic capital markets. They are therefore either in net external asset position or have limited net external debt. 

Turkey is the exception. Its significant external debt, typically short term, exposes the banking system to roll-over risks. So far, banks have been able to roll a large portion of maturing debt. They also have some foreign currency denominated liquidity (a large portion of it is placed with the CBT 

Banking Industry Country Risk Assessment: United Arab Emirates

S&P Global Ratings classifies the banking sector of the United Arab Emirates (UAE) in group ‘5’ under its Banking Industry Country Risk Assessment (BICRA). Other countries in group ‘5’ are Bermuda, Hungary, Iceland, India, Italy, Malta, Mexico, Panama, Peru, Philippines, and Qatar (see chart 1). We use our BICRA economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in the UAE is ‘bbb-‘.

The UAE has a wealthy economy with strong fiscal and external positions. The strength of the government’s net asset position has helped counteract the negative impact of lower oil prices on economic growth since late 2015. However, the dual shock of the sharp drop in oil prices and lower economic activity due to COVID-19 will lead to a rise in problem loans and the cost of risk for banks in the UAE in the next 12-24 months. Although UAE banks traditionally operate with healthy profitability metrics, the shift in U.S. Federal Reserve monetary policy toward a more accommodative stance will have negative consequences for banks’ margins. In addition, we expect credit losses to increase in 2020-2021, leading to a slump in sector profitability.