Global financial institutions’ (FIs) credit ratings have been affected less severely by the pandemic than by the two previous crises this century, Fitch Ratings says. The agency’s transition and default analysis shows that global FI ratings fell by 0.15 of a notch on average from January 2020 to March 2021, compared with 0.84 of a notch during the global financial crisis (July 2007 to July 2009), and 0.71 of a notch for EMEA FIs during the eurozone crisis (January 2010 to January 2013).

Global FIs, including banks, non-bank financial institutions (NBFIs) and insurance companies, experienced a significant increase in downgrades after the onset of the pandemic. The proportion of ratings downgraded in 2020 was 13.6%, compared with 7.3% in 2019. However, downgrades were far fewer than those due to the global financial crisis, which exceeded 30% in 2009. Multi-notch downgrades were also far fewer, at 2.3% of the global FI portfolio in 2020, compared with 14.2% in 2009.

The vast majority of ratings were unchanged in 2020 because near-term credit risks were largely offset by government support to economies and borrowers. Regulatory forbearance in some jurisdictions also helped issuers to operate effectively through the periods of greatest uncertainty. Consequently, most of the negative rating actions in 2020 were limited to Negative Rating Outlooks and Watches, centred on issuers whose ratings were more likely to face pressure as the fallout of the pandemic continued. Bank and NBFI ratings were more affected than insurance ratings, primarily reflecting adverse operating environment and asset quality dynamics, and in the case of NBFIs, elevated funding pressure.

Since end-June 2020, the number of Negative Rating Outlooks and Watches on global FIs has steadily declined as pressure from the pandemic has receded as a result of rapid vaccinations in many developed markets, the easing of lockdown measures, and a general economic recovery.

Where there have been downgrades, they have often been due to secular challenges rather than the pandemic. Bank ratings in several emerging markets have also been affected by sovereign rating actions, notably in Latin America. This is because many bank ratings in these jurisdictions are driven by sovereign support or otherwise constrained by the sovereign rating.

The proportions of insurance and NBFI ratings on Negative Outlook and Watch have normalised to around pre-crisis levels but the normalisation for banks is taking longer due to lingering operating environment and sovereign risks. Downgrade risks for FIs remain concentrated in Latin America, along with some banking sectors in the Middle East and Africa, which could face pressure as monetary policy normalises. We believe peak global fiscal stimulus has passed, with the policy debate increasingly focused on inflationary pressures.

For information on all pandemic-related rating activity, see the Coronavirus Rating Snapshot page at www.fitchratings.com/topics/coronavirus.