Dagong Global Credit Rating Group Co., Ltd (hereinafter referred to as “Dagong”) released Dagong's 2017 Credit Outlook for the Global Banking Industry On February 6th, forecasting the trend of credit risks in 2017 global banking industry under the environment of ultra-low interest rate and the expansion of shadow banks.
In 2017, the rise of global financial uncertainties will cause the banking industry’s overall credit risk to face an upward trend, as the difference in the credit risks of banking industries amongst major countries is increasing. The US banking industry will continue its steady pace of recovery, rendering credit risk to decrease; the European banking industry is suffering from a lack of profitability due to ultra-low interest rates, with some countries showing signs of credit crisis; the Chinese banking sector’s asset quality deterioration and weak profitability will accelerate its credit risk, while other emerging-market countries’ banking sectors will face the pressure of asset quality deterioration and liquidity tightening through varying degrees. Some countries with a larger vulnerability may continue to have the chance of a possible emerging crisis.
The main analysis is shown below:
I. With the improvement of asset quality, capital strength, and profitability to varying degrees, the US banking industry’s credit risk will remain stable with a slight decline, although long-term potential risks cannot be ignored.
In 2017, the US banking industry’s credit risk will remain stable given the continuous and steady improvement of both credit quality and capital strength. Considering various positive factors such as the slow recovery in international commodity prices and the continuous rebound in the real estate market, it is expected that US banks’ NPL ratio will continue to slightly decrease to approximately 1.4% in 2017. Subject to the Basel III transitional arrangements in 2017, the US banking industry’ capital strength will be gradually improved. However, although the Federal Reserve’s interest rate hike, the trend of financial deregulation and the decline in provision pressure will further benefit the banking industry’s profitability, improvement in profitability will be limited. In the long run, financial market risk accumulation brought by the prolonged loosening monetary policy and financial deregulation will cause the US banking industry to continue to face greater challenges in the future.
II. Low profitability and high NPLs will continuously impede the improvement of credit amongst the European banking sector whose future credit risk will remain high.
In 2017, the prospect for improving profitability is foggy, which is adverse to mitigate the credit risk of the banking sector. Constrained by the quantitative easing monetary policy and regulatory pressure, the European banking sector’s profitability is expected to wander around its current low level. Few countries such as Ireland and Spain, where the real estate market has recovered, have seen an improvement in the banking asset quality, but inadequate loss provision, accelerated domestic political fragmentation, and difficulties in reaching a consensus about the banking sector’s assistance program between the EU and the sovereign governments will continue to hinder countries such as Italy and Greek to solve the high NPLs problem. For some northern European countries, given high housing prices and home sector debt, real estate bubble will be a driver of the banking industry’s credit risk in the future. Overall, in 2017, banks in countries like Italy will continue to have outstanding credit risks and bail-outs seems inevitable in the future, the European banking industry’s credit risk remains particularly high.
Ⅲ. Increasing NPLs, declining profitability and continuing tight liquidity will increase the credit risks of China’s banking industry, but the overall risk remains controllable.
In 2017, the asset quality of Chinese banks will continue to be under pressure due to the downward economy. Influenced by the slowdown of the Chinese economy and the adjustment of industrial structure, the provision coverage ratio has continued to decline, to nearly 150% of the regulatory red line. Although the introduction of diversified NPLs disposal is helpful to solve the problem of bank bad loans, with the deepening of the supply side reform and the acceleration of clearance of excess capacity industries, the credit risk of Chinese companies will become more prominent and the asset quality of Chinese banks will continue to face the risk of deterioration.
Increasingly fierce competition and the pressure of NPLs disposal will continue to press the profitability of Chinese banks. In 2017, under the influence of interest rate liberalization, the increasingly fierce competition in the financial market will further compress the net interest margin of banks, while the rising risk of asset quality deterioration will increase pressure on more impairment provisions. Affected by this, in 2017, the Chinese banking industry will continue to develop non-interest and off-balance businesses in order to maintain profit, but the resulting problem of mismatched maturity of assets and liabilities will push up bank’s liquidity risk and contribute to the development of shadow banking. Nevertheless, with the reinforcement of financial supervision, the overall credit risk of China's banking sector is expected to be under control in 2017.
IV. Banks in emerging market countries are subject to the dual adverse effects of the prolonged downturn in macro-economic and capital outflow triggered by the raising of the US interest rate; the credit risks of these banks are on the rise.
The credit risks of banks in emerging market countries will be pushed up to varying levels due to the increasing pressure in macroeconomic downward and the tightening of international liquidity. The US interest rate hike in 2017 and the expectations of a further raise will enhance the trend that capital flow from emerging markets back to the United States. The resulting capital outflow and currency devaluation will further drive up the external financing costs of banks and exacerbate the fluctuation in domestic financial markets. The liquidity risk of the banking industry will therefore rise. In response to the pressure of capital outflow and currency devaluation, expect for the countries with relatively serious inflation, the interest rates of other major emerging market countries will face an upward pressure. The increase in financing costs and the prolonged downturn in the economy will slow down the credit growth of the banking industry in emerging market countries and undermine the repayment capability of both companies and individuals; as a result, the asset quality of banks is facing the risk of deterioration and credit risk is increasing significantly.