Rating outlooks for financial institutions stabilising, says Fitch

One in every five rating actions that Fitch Ratings took on global financial institutions (FIs) in 1Q21 led to a rating Outlook revision to Stable from Negative, signalling that near-term ratings risks are easing. However, downside risks remain, including potential further coronavirus waves, weakened sovereign credit profiles and an economic fallout as governments gradually withdraw pandemic-related economic support.

Of the 317 rating actions taken on global FIs between 1 January and 31 March, 66% led to unchanged ratings and Outlooks, while 20% led to Outlook revisions to Stable from Negative. Only 11% of rating actions were negative, evenly split between downgrades and Outlook revisions to Negative.

Banks had the highest proportion of negative rating actions in 1Q21, reflecting sovereign rating actions and weakening standalone credit profiles. Non-bank financial institutions (NBFI) downgrades reflected a mix of downgrades of corporate parents, sovereigns, standalone credit weaknesses and M&A.

The proportion of global FI ratings on Negative Outlook or Watch continues to decline but remains high by historical standards despite the mitigating macroeconomic effects of fiscal and monetary stimulus, with 54% of bank ratings, 33% of NBFI ratings and 24% of insurance ratings on Negative Outlook or Watch at end-1Q21.

“We expect stabilisation trends over the rest of 2021 to vary by region due to contrasting speeds of economic recovery and different degrees of exposure to the sectors most affected by the pandemic,” Fitch said. Several FI ratings are sensitive to the pressure that remains on some sovereign ratings, particularly in emerging markets, and on those corporate sectors and asset classes worst affected by the pandemic, such as leisure and hospitality, it added.