Global financial institutions’ (FIs) rating downgrades continued to outnumber upgrades in 4Q22, due to the economic slowdown and sovereign rating actions in emerging markets (EMs), Fitch Ratings says. We expect the weakening economic environment to put pressure on FIs’ financial profiles over the next several months, potentially leading to further negative rating actions.
 
Generally, persistently high inflation increases operating expenses for all FIs, with property and casualty insurers also pressured by difficulties in repricing policies amidst growing claims costs. Funding costs are increasing for banks and non-banking financial institutions (NBFIs) reliant on wholesale sources, and business volume growth is decelerating, partly offsetting the benefit of higher interest rates. We also expect loan impairment charges to increase in the coming months, although from a benign base.
 
While the preponderance of downgrades indicates negative credit trends, it also contributed to the share of Negative Outlooks and Watches rebalancing closer to pre-pandemic levels.

Insurance is the only sub-sector where the share of Negative Outlooks and Watches increased slightly (to 9% at end-2022, from 8% at end-September 2022), mainly driven by Asia-Pacific insurers, 19% of which have Negative Outlooks or Watches – up 4pp quarter-on-quarter.
 
EM sovereigns with Negative Outlooks (particularly Egypt, the Philippines, Peru and Turkiye) increase the risk of downgrades in the banking sectors of these countries. In addition, banking sectors with ratings in the ‘CCC’ category, such as Ukraine, Argentina and Iraq, face downgrade risks. Nevertheless, the proportion of Negative Outlooks and Watches in the global banking portfolio went down to 10% at end-2022 (end-2021: 24%).
 
The risk of further downgrades in the NBFI sector is the highest among Turkish issuers, which is related to the Outlook on the sovereign.