Emerging market (EM) banks experienced the majority of negative ratings trends, heavily influenced by rating actions in Brazil, Russia, Saudi Arabia and Nigeria. In EMs, 29% of bank ratings are still driven by sovereign support, either directly or via state-supported parents. Sovereign downgrades triggered many EM bank downgrades because they signalled weakened ability to support. Almost 30% of EM bank Outlooks are Negative.
In the developed markets (DM), there was some good news. There were 16 rating upgrades of DM banks in 1H16, the highest number since before the global financial crisis. Six Swedish and Dutch banks were upgraded and an improved operating environment paved the way for upgrades in Slovenia. Cyprus banks' ratings were also upgraded but ratings are still low in the 'B' category.
Negative Outlooks (13%) still outweigh the Positives (10%) in the DMs but the gap is narrowing. DM banks have made significant progress in reducing legacy assets and strengthening capitalisation and we expect those banks, which have successfully restructured operations, to see some upside rating potential. However, banks that remain weighed down by large asset quality problems could be downgraded over the next one to two years. This is the case for the Italian banks where ratings Outlooks are mostly Negative. For Japan's three large banks Outlook changes to Negative in 1H16 were driven by the changed Outlook on the sovereign's rating.
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