Banks’ recovery from pandemic to take long, say rating agencies

Banking systems across the globe may take a long time to recover from the impact of the pandemic and for some geographies, including India, the recovery may extend beyond 2023, rating agency S&P Global said on Thursday. The key threat to banks is a meaningful second wave of the pandemic, leading to either a new round of blanket lockdowns, with further severe implications for economic activity, or to self-imposed changes in behaviour with a similar if milder effect, Moody’s Investors Service said in a separate report.

S&P said that it has made negative revisions for 42 of its 88 Banking Industry Country Risk Assessments (BICRAs) since the onset of the crisis, including on its views of economic and industry trends. Its base case assumes an economic rebound in 2021, following the release of a vaccine by about the middle of that year. There is likely to be a lag between when an economic recovery takes hold and when the credit strength of banks stabilises. Late-exiter banking jurisdictions are those where the pandemic and other stresses have already had a meaningful negative effect. India is among them.

“We have taken negative rating actions on Indian banks and NBFIs as operating conditions have deteriorated through the crisis. The country entered the pandemic with an overhang of high nonperforming assets,” S&P said.

While profits have been strained for the past few years, lower-for-longer interest rates have become more widespread and entrenched post-Covid, S&P said. Banks will likely strain to claw their way back to 2019 profit levels. The Indian banking sector’s recovery will be longer, but some ratios may return more quickly to pre-Covid-19 levels as they were weak prior to the onset of Covid-19 (in contrast with many other jurisdictions). “There were significant asset-quality issues in India prior to the onset of Covid-19, while asset quality was on an improving trend in many other jurisdictions,” S&P said.

Moody’s said that thanks to 10 years of broadly benign economic conditions and relentless regulatory pressure to reinforce balance sheets, most banking systems are in good shape. They have the capacity to withstand an inevitable rise in bad debts over the coming months as individuals and companies begin to default.
Government and central bank actions have delayed and softened the impact of the coronavirus.

This is true for both financial markets and the real economy, ensuring adequate access to liquidity and funding for banks and corporates. “It means that, in contrast to 2008, the financial system is more likely to act as a shock absorber than as an amplifier,” Moody’s analysts wrote.

Since the onset of the coronavirus crisis, the prospect for banks has turned decisively for the worse. Just over three quarters of Moody’s 70 banking system outlooks are now negative. No banking system is on an improving trend. This compares with only 14% negative at the end of 2019, and 45% positive. The ability to preserve and restore capital in the medium term is a critical support for creditworthiness of banks. Rapid digitisation and the prospect of near-interminable low interest rates compound the difficulties facing banks with weaker efficiency, Moody’s said.