We expect continuing global economic growth, stable financial conditions in most regions

S&P Global Ratings

Most rated banks and insurance companies around the globe will experience only moderate changes in their creditworthiness and performance in 2018, in S&P Global Ratings' opinion. We expect continuing global economic growth, stable financial conditions in most regions, and the still cautious stance of the major central banks to remain supporting factors.

That said, we also see increasing downside risks to financial stability, perhaps belying the sanguine signals that markets are currently sending. Considerable monetary stimulus over a protracted period appears to have driven a sharp rise in asset prices and numbed market volatility even in the face of geopolitical uncertainty, and a potential reduction in the size of central banks' balance sheets.

 

On the upside, if the global economy grows at or beyond the 3.7% pace S&P Global's economists currently expect, the odds of considerable instability would certainly diminish.

Beyond the global macroeconomic story, we believe that common drivers of a regulatory, political, and monetary nature will lead to divergence in the credit outlook regionally, and between the various financial services sectors. To understand how these factors may influence ratings, we surveyed S&P analysts around the world who follow hundreds of financial institutions (banks and nonbank financial institutions) and insurance companies, asking whether they think the credit quality of the companies they rate will improve or weaken in 2018. We show the overall results below and delve into each region later in the article.

For financial institutions globally, slightly more than one-third of analysts expected the credit quality of the companies they monitor to be mostly stable. Of the remainder, the majority of analysts were evenly split between expecting some of the companies to weaken and some to improve, while only a few expected the credit quality of most of their companies to either improve or weaken. Analysts covering banks in Latin America were the most pessimistic, while those covering banks in Western Europe were the most optimistic.

About 60% of insurance analysts expected little change in the creditworthiness of the companies they followed, while almost 25% expected some companies to weaken, and the remainder expected some to improve. Analysts covering insurance companies in emerging markets were more pessimistic.

In Asia Pacific region we expect that a moderately negative rating outlook bias will persist during 2018.

What are the key risks in 2018? Property is a key risk in China, Hong Kong, Australia, and New Zealand. Other market risks, including likely tighter monetary policy in the U.S., potentially volatile foreign currency and commodity markets, and a possibly sharp correction in asset prices, could worsen financial institutions' credit quality, particularly if associated with a pullback in market liquidity.

We see high or increasing debt as a key risk factor. Banks in Australia, Korea, Malaysia, Singapore, and Thailand are grappling with rising household debt, while leverage in China's nonfinancial corporate sector is high. Meanwhile, the outlook for asset quality is mixed. Our base case is that nonperforming loans should remain relatively low in some jurisdictions (including Taiwan, Australia, Hong Kong, and Japan) but will remain much higher in some others, notably India.

Recent capital infusions by the Government of India, however, will improve the balance sheet quality of Indian public sector banks.

The transition to resolution frameworks that imply a lower likelihood of government support--such as recently occurred in Hong Kongor potentially weaker sovereign credit quality could also put pressure on our ratings on banks.

Finally, we are wary of the potential destabilizing impact of low-probability but high-impact risk scenarios, such as a significant adverse market or political event. The emergence of a significant negative event could have a significantly more negative impact on bank ratings compared with our current base case outlook.

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