Global Banks 2020 Outlook - The Unrelenting Hunt For Returns Emmanuel Volland Elena Iparraguirre Cynthia Cohen Freue Mohamed Damak - S&P Global
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Global Banks 2020 Outlook
Emmanuel Volland Brendan Browne
Elena Iparraguirre Gavin Gunning
Cynthia Cohen Freue Mohamed Damak
The Unrelenting Hunt For Returns Nov. 18, 2019
Contents
Key Takeaways 3
BICRAs, Ratings, and Outlooks 4
Low For Longer 7
Fintechs – Disruption 8
Emerging Markets 9
Regulation – Resolution 10
Brexit 11
Market Liquidity 12
Climate Change 13
North America 14
Europe 18
Asia-Pacific 23
Latin America 28
Related Research 32
Analytical Contacts 33
2Key Takeaways
– Credit conditions remain broadly supportive of banks' asset quality even if the
economy is slowing down.
– Trade and geopolitical tensions remain elevated and undermine confidence.
– Central banks' responses to counter the slowdown are positive for banks' funding
conditions but increasingly call into question their business models.
– The pressure on profitability is mounting, especially in Europe and Japan.
– The vast majority of outlooks on banks is stable globally, supported by low credit
losses and high capitalization.
– Technology is disrupting retail banking across the globe.
3BICRA And Trends For Top 20 Banking Markets
BICRA changes in 2019*
– Japan lowered to 3 from 2
– Argentina lowered to 9 from 8
– Israel raised to 3 from 4
– Poland raised to 4 from 5
– Philippines raised to 5 from 6
– Indonesia raised to 6 from 7
– Greece raised to 9 from 10
Trend changes in 2019*
– Economic and industry risks to negative
from stable on Germany
– Economic risk to negative from stable on
Mexico
– Economic and industry risks to stable
from negative on Brazil
– Economic risk to stable from positive on
*The list only includes a selection of the changes made so far in 2019. A BICRA (Banking Industry the Netherlands
Country Risk Assessment) is scored on a scale from 1 to 10, ranging from the lowest-risk banking
systems (group 1) to the highest-risk (group 10). Data as of Nov. 15, 2019.
4Broadly Stable Ratings In 2019
Ratings Distribution For The Top 200 Rated Banks
AAA November 2018
AA+ November 2019
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
CCC-
0 5 10 15 20 25 30 35 40 45 50
Number of ratings
Operating company issuer credit ratings. Data as of Nov. 15, 2019. Source: S&P Global Ratings.
5The Ratings Bias Is Now Relatively Flat
Outlooks For The Top 200 Banks By Region
Negative
Nov. 2019 15% 69% 16%
Western
Stable
Europe
Positive
Nov. 2018 11% 61% 28%
Nov. 2019 3% 90% 7%
America
North
Nov. 2018 94% 6%
Asia-Pacific
Nov. 2019 4% 86% 10%
Nov. 2018 10% 82% 8%
Nov. 2019 33% 59% 8%
America
Latin
Nov. 2018 8% 92%
CEE & MEA
Nov. 2019 8% 92%
Nov. 2018 21% 71% 8%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Note: Ratings bias is positive bias minus negative bias. Data as of Nov. 15, 2019. CEE--Central & Eastern Europe; MEA--Middle East & Africa. Source:S&P Global Ratings.
6Low For Longer Interest Rates
– Extremely accommodative monetary policies are enabling economic imbalances to surface.
– The outlook for interest rates is also gradually pulling down banks' net interest margins.
– This is increasingly making weak profitability a structural problem.
– The pressure is particularly negative in Europe and Japan.
– Banks need to take strategic measures to improve efficiency as the pain will likely get worse before it
gets better. Those less able to make structural changes will suffer more.
10-Year Government Bond Yields Continue Their Decline
10% 10% USA
Germany
8% 8%
UK
6% 6% Japan
4% 4%
2% 2%
0% 0%
-2% -2%
Source: Refinitiv.
7Tech Is Disrupting Retail Banking
Opportunities And Threats From Tech Disruption Relate To Four Factors
Technology Regulation Industry Preferences
China
Very High
C
C G C
F France
High
S U.K. U.K. F F GCC S U.K. G Germany
Risk for banks
GCC GCC
Moderate
G GCC F G S F C GCC U.K. G
S Sweden
U.K. U.K.
Low
GCC C S
Very Low
Banks‘ technological Regulatory stance Structure of the Client preferences for
capabilities relative toward innovation and banking system and new technologies and
to nonbank nonbank competition its ability to adapt and digital banking and
competitors invest perceived likelihood to
switch to nonbank
competitors
Note: GCC--Gulf Cooperation Council. Source: S&P Global Ratings.
8Emerging Markets See Easing Financing Conditions
– Emerging-market growth is the weakest in a decade, and the pickup in 2020 will be unspectacular.
– Financing conditions continue to ease, driven by Fed and ECB, which is positive for capital flows.
– Investors' appetite for emerging markets prevails, but selectivity is increasing.
– Geopolitical risks, political instability, and social unrests are hurting a number of banking sectors.
– Dependence on external debt is a high risk for some banks, including in Turkey, Qatar, and Lebanon.
– High leverage in China remains a key concern, although the largest banks remain resilient.
Resilient Portfolio Flows To Emerging Markets Are Expected To Continue
80 EM ex-China equity
China equity
60
Debt
40 Total portfolio flows
Bil. US$
Total flows, average 2010-2014
20
0
-20
Sources: IIF, S&P Global Ratings calculations.
9Regulation And Resolution: Coming To A Finish Line
Basel III finalization is the high point in a multiyear overhaul of prudential regulation
– Full implementation (in most jurisdictions) will not be completed before 2028.
– We expect an improved comparability in ratios despite areas of uneven implementation of global
standards.
– Generally, we expect a much higher impact on capital ratios for European banks.
– We see policymakers taking measures to ease the burden on smaller, simpler institutions.
– We view U.S. regulators' finalized rules on the tailoring of bank regulation to the systemic risk
they pose as slightly credit negative.
There are stark differences in the implementation of bank resolution frameworks
– A steady push continues to make systemic banks resolvable.
– The EU and U.S. have already transitioned to effective bail-in regimes.
– European jurisdictions remain behind the U.S. in implementation.
– Other G-20 policymakers are cautious about eliminating possibility of extraordinary government
support.
– Nearly 40% of unsecured bank debt in North America and Europe is rated in the 'BBB' category, up
from 25% four years ago, as loss-absorbing instruments account for a growing share of funding.
10Softening Conditions Ahead Of Brexit Endgame
Major U.K. Banks Profit Margins Provide Some Buffer
Pretax margin Preprovision income / revenues margin – The major U.K. banks show
60% continuing robust asset quality
metrics, stable capital, and
50%
healthy funding and liquidity.
40% – This provides a firm foundation
30% to weather Brexit-related
uncertainties and other risks
20% such as trade tensions.
10% – While U.K. banks have built
resilience, a no-deal Brexit
0%
could change our broadly stable
-10% ratings assessment.
-20%
-30%
*Data for 2019 is for the half-year. Source: S&P Global Ratings database and definitions, and company accounts. Data is based on six-bank aggregate (Barclays,
HSBC, Lloyds, Nationwide, RBS, and Santander UK (where available).
11Spike In U.S. Repo Rates - Market Liquidity Is Key
Excess Reserves In U.S. Banking System Have Declined
3,000 – The mid-September spike in
repo rates likely resulted from
technical factors and financial
2,500
requirements that limit banks'
willingness to support market
2,000 financing.
– Fed balance sheet contraction
Bil. US$
1,500 caused excess reserves in the
system to fall.
1,000 – The incident doesn't reflect
credit fears about participants
500 but shows the fragility funding
markets can display.
0
Note: Monthly, not seasonally adjusted. Source: U.S. Federal Reserve Bank of St. Louis.
12Climate Change Poses Risks For Banks
– The shift to a lower-carbon economy poses physical and transition risks for banks.
– We see as positive regulators' initiatives to encourage banks to better quantify climate-related risks
and embed them in strategy and in setting risk appetite.
– However, there is an urgent need for banks to improve and standardize data transparency.
– Climate change considerations could materially transform the way banks operate and have a greater
influence on their creditworthiness, since some of them will inevitably be better prepared than others.
Banks Are Now The Main Issuers Of Green-Labeled Bonds
Other debt instruments Asset-backed securities Local governments Government agencies
Sovereigns Development banks Corporates Banks
200
150
Bil. US$
100
50
0
2012 2013 2014 2015 2016 2017 2018 2019E
E—Estimate, includes the $118 billion issuance as of June 30, 2019, and S&P Global Ratings' forecast of $180 billion for the full year.
Source: Climate Bonds Initiative.
13Credit Conditions: North America
A Divergence In Investment- And Speculative-Grade Corporate Composite Spreads
Five-year speculative grade (left scale) – We expect the U.S. economy to
Ten-year investment grade (right scale) slow in 2020 to 1.7%.
900 250
– We put the risk of a U.S.
800 recession at 30%-35%.
200 – Following three rate cuts in
700
2019, we expect the Fed to hold
600
150
rates flat in 2020.
– The reduction in interest rates
bps
bps
500
weighs on bank margins and will
100
400 fuel further growth in leveraged,
300
student, and auto loans.
50
– The buildup in nonfinancial
200
corporate debt is a source of
100 0 potential instability.
Data as of Aug. 31, 2019. Source: S&P Global Ratings Research.
14North American Banks
Key Expectations
– Reduced interest rates are likely to limit earnings growth for most U.S. banks in 2020, if not cause declines.
– Loan growth is to remain in the low- to mid-single digits, which could partly offset the negative impact of lower
margins.
– Banks will continue to contain costs by consolidating branches, containing head count, and further digitization.
– The 2020 implementation of new accounting standards for loan loss provisions will likely cause reserves to rise
notably, particularly for banks with large consumer loan exposures.
– For Canadian banks, we expect operating performance to gradually strengthen.
Key Assumptions
– GDP growth should slow to 1.7% and 1.4% in the U.S. and Canada in 2020.
– Credit losses have likely bottomed out and may gradually increase.
– The U.S.-Mexico-Canada free trade agreement will remain on a slow path toward ratification.
Key Risks
– Corporate credit quality, particularly in leveraged lending, could deteriorate after several years of rapid growth.
– Credit quality may also worsen in auto, student, credit card, and commercial real estate lending.
– In Canada, a sufficiently negative employment shock could trigger a substantial decline in home prices, given elevated
prices. This could be accompanied by noticeably higher losses on consumer loans.
15Leveraged Loans Are Mostly Held By Nonbanks
– The issuance of leveraged loans cooled materially in the first half of 2019.
– CLOs continue to be the largest buyers of leveraged loans, with banks holding only a small minority.
Leveraged Loans Continue To Rise Nonbanks - Primary Investors Of Leveraged Loans
Outstanding % covenant lite (of new issues) U.S. banks CLOs
1,200 90% Loan mutual funds Hedge, distressed & high-yield funds
Other
80%
1,000
70% 100%
90%
800 60%
80%
50% 70%
Bil. US$
600
60%
40%
50%
400 30% 40%
20% 30%
200 20%
10%
10%
0 0% 0%
2011 2012 2013 2014 2015 2016 2017 2018 3Q19
Source: Leveraged Commentary & Data (LCD).
16Bank Earnings To Plateau Or Fall On Lower Rates
– While U.S. banks benefited from higher rates and a cut in the corporate tax, recent rate cuts by the Fed
are likely to erode their earnings.
– Historically, drops in the Fed funds rate have led to lower net interest margins.
Fed Funds Rate And NIM Are Correlated Earnings And Margins Gained Strength
Effective Fed Funds Rate, quarterly average (left scale) Net income (left scale) Taxes paid (left scale)
NIM, All FDIC-Insured Commercial Banks (right scale) Net interest margin (right scale)
7.0% 4.6% 300 3.4%
6.0% 4.4%
250 3.3%
4.2%
5.0%
200 3.2%
4.0%
4.0%
Bil. US$
3.8% 150 3.1%
3.0%
3.6%
100 3.0%
2.0%
3.4%
50 2.9%
1.0% 3.2%
0.0% 3.0% 0 2.8%
3Q91
4Q92
1Q94
2Q95
3Q96
4Q97
1Q99
2Q00
3Q01
4Q02
1Q04
2Q05
3Q06
4Q07
1Q09
2Q10
3Q11
4Q12
1Q14
2Q15
3Q16
4Q17
1Q19
2015 2016 2017 2018 2Q19
Source: U.S. Federal Reserve economic data. Source: S&P Global Ratings.
17Credit Conditions: EMEA
– We expect somewhat weaker eurozone growth for 2020 at 1.1%, primarily reflecting slower
manufacturing conditions in Germany. The U.K. economy will continue to slow due to Brexit uncertainty.
– The ECB’s new expansionary package will maintain rates in negative territories at least until 2023.
– The risks to growth and confidence remain mainly political: increasing global trade tensions, Brexit, and
political fragmentation.
Germany And Italy Weigh On Eurozone Growth Low Yields Pose Challenges To Banks
Actual Dec-18f Sep-19f Actual Dec-18f Sep-19f
3.0 3.0
2.5
10yr Bund yield (%)
2.5
2.0
1.5
GDP (YoY %)
2.0
1.0
1.5 0.5
0.0
1.0
-0.5
0.5 -1.0
Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21
Source: S&P Global Ratings. f—S&P Global Ratings forecast. Source: S&P Global Ratings. Refinitiv. Actual yields are quarterly averages.
18EMEA Banks
Key Expectations
– The ratings bias is flat and likely to turn negative through 2020.
– In the absence of meaningful strategic initiatives to tackle costs and restructure, the business models of some banks
will come under more pressure.
– Capitalization and asset quality should hold up, and we could see further asset quality improvement in some markets.
– Systemic banks will continue making progress in the buildup of bail-in buffers.
– The rationale for consolidation is stronger than ever, but most banks are unwilling to pursue it.
Key Assumptions
– The U.K. will not leave the EU without a deal.
– Economic growth will be modest, but the region will not enter into recession.
– The success of monetary policy actions in boosting growth will be limited in the absence of fiscal stimulus.
– Credit conditions will remain favorable and support refinancing and asset quality.
Key Risks
– A disruptive Brexit that leads to a severe economic downturn in the U.K.
– Economic growth challenges spread to eurozone countries other than Germany and Italy.
– A lack of a decisive response from banks to their low profitability.
– A build-up of asset bubbles, higher risk taking, or irrational pricing dynamics.
19The Challenges Of Low-For-Much-Longer Rates
1. Low Profitability Is Becoming A Structural Issue 2. Banks Need To Tackle Their Costs
2020 projected ROE (%) 2020 projected cost-to-income ratio (%)
Median: 6.8%
20 100
15 80
Median: 59%
10 60
5 40
0 20
(5) 0
3. Risk Of Build Up Of Bubbles In Property Markets 4. Too Low Pricing For Risk In Corporate Europe
Iceland Austria Hungary 6%
Luxembourg Germany Czech Rep.
Portugal Netherlands B
5%
200
(Index, Q4 2009=100)
4%
175
3%
150
BB
2%
125
BBB
100 1% A
AA
75 0%
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
-1%
1M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
1. Projected 2020 return on equity for top 100 EMEA banks. 2. Projected 2020 cost to income ratio for top 100 EMEA banks. 3. Increase in nominal house prices.
4. Yield curves for EMEA nonfinancials by rating category. Source: S&P Global Ratings.
20Key Issues In EMEA Banking Systems
1. Germany: Profitability Is Under Pressure 2. France: Need To Address Inefficiencies
Lending margin Cost-to-income ratio
Top 50 European banks Top 5 French banks
4.0%
70% 69
67 68 68 67
66 67 67
3.0% 65
65%
2.0% 63
60% 62 62
60 61
59 59
1.0% 55% 56 57
0.0% 50%
GR IE PT PL ES UK BE FR DK AT SE DE IT NL 2012 2013 2014 2015 2016 2017 2018 2019F 2020F
3. UK: Impact Of Brexit On The Economy 4. Italy: Workout Of Legacy NPAs
NPA to loans (right scale)
UK GDP (volumes) Cost of risk (left scale)
% Baseline % No-deal Brexit % Global financial crisis Estimated average credit losses over a cycle
110 25%
200
105 20%
160
100 15%
bps
120
95 80 10%
90 40 5%
85 0 0%
1. Lending margins are measured as the difference between interest rates for new business loans and a weighted average rate of new deposits. Sources: ECB, S&P
Global Ratings. 2. Inefficiencies measure based on the cost-to-income ratio (%). F--S&P Global Ratings forecast.
21Prospect For Emerging Market Banks In EMEA
1. GDP Growth Will Only Recover Slightly 2. Asset Quality Is Broadly Stable Except In Turkey
Lines--NPLs / total loans. Bars--Provisions / NPLs
GCC Turkey Russia South Africa
GCC Turkey Russia South Africa
8% GCC Turkey Russia South Africa
6% 12% 180%
160%
10%
4% 140%
8% 120%
2% 100%
6%
80%
0% 4% 60%
40%
-2% 2%
20%
-4% 0% 0%
2015 2016 2017 2018 2019F 2020F 2021F 2015 2016 2017 2018 2019F 2020F 2021F
3. Turkey, Qatar, Lebanon: Vulnerable Funding 4. Profitability Is Stabilizing
Net banking sector external debt as a % of system wide domestic loans Return on assets (%)
Qatar South Africa Lebanon Turkey GCC X Qatar / Bahrain Russia GCC South Africa Turkey Russia
70 2.0
60
50 1.5
40
30
1.0
20
10
0 0.5
-10
-20 0.0
2015 2016 2017 2018 2019F 2020F 2021F 2015 2016 2017 2018 2019F 2020F 2021F
F--S&P Global Ratings forecast. Source: S&P Global Ratings.
22Credit Conditions: Asia-Pacific
– We expect credit conditions to be bumpy. While interest rates should trend lower or hold steady, China's economic
slowdown and the trade war is dampening consumer and lender sentiment. In turn, this is holding down revenue
and profit growth, intensifying refinancing risk.
– U.S.-China trade-tech tensions have dragged on and growth has come in below our expectations.
– The greatest near-term risk for banks is the strategic conflict between the U.S. and China. Other top risks include
corporate refinancing and market liquidity, property repricing, and China's debt leverage.
U.S. - China Trade Dispute Asia-Pacific's Investment-Led Slowdown
U.S. imposed tariffs on remaining US$300 Bil. of Chinese imports Real GDP growth and investments
As of Sep 23, 2018 List 4A (Sep 1, 2019) List 4B (Dec 15, 2019) Not covered GDP Investment
Toys and sports equipment 12%
Footwear
Textiles and clothing
10%
Electronics and electrical machinery
Stone and glass
Machinery 8%
Vegetable products
Plastics and rubber
Wood products
6%
Metals
Fuel 4%
Miscellaneous
Chemicals
Prepared foodstuffs 2%
Animal products
Transportation equipment 0%
Hide and skins
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Mineral Products
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: U.S. International Trade Commission Dataweb. Note: GDP weighted by purchasing power parity, excluding China and Vietnam
due to data availability. Sources: CEIC, S&P Global Ratings Economics.
23Asia-Pacific Banks
Key Expectations
– The majority of outlooks is stable and are likely to remain so in 2020.
– The regional slowdown means that banks may see a slight erosion in their asset quality.
– Nonperforming assets in India – a negative outlier – will remain high.
– Earnings and capital should remain generally supportive of ratings at current levels.
Key Assumptions
– A slower macroeconomic outlook. The cyclical downturn in Asia-Pacific trade will likely challenge asset quality and
profitability but should be manageable at current rating levels for most banks.
– No significant increase in geopolitical stresses, including in Hong Kong where protests have remained contained, with
limited spillover to other economies.
– Governments will remain supportive. In contrast with Western Europe and the U.S., systemically important banks in
most jurisdictions will likely benefit from government support in case of need.
Key Risks
– High private-sector indebtedness and high asset prices amid a protracted low interest rate environment across much
of the region. These factors set the stage for a potential deterioration in credit quality.
– A range of property risks across much of Asia-Pacific banking--including banks' high exposure to property, high
property prices, and corporate-sector property risks--are a risk for asset quality.
24Asia-Pacific Banks
1. GDP Softens Due To Trade Tensions 2. China Debt Ratios Shift Higher
2018 2019 2020 2021 2022 Household credit-to-GDP
Corporate credit-to-GDP
8 Government credit-to-GDP
7
300%
6
5 250%
4
3 200%
2
150%
1
0 100%
50%
0%
2013 2014 2015 2016 2017 2018 2019 Q1
3. Residential Property Prices Trend Higher 4. NPAs Are Lower For Strong Banks
Australia China Hong Kong SAR India 2012 2013 2014 2015 2016 2017 2018 2019F 2020F
Japan Korea Malaysia Singapore 5.0%
Phillipines New Zealand Thailand Indonesia
4.0%
250
Index value
200 3.0%
150 2.0%
100
1.0%
50
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
0.0%
Asia-pacific excl. Western Europe North America Japan
Japan
1. *For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22. §Asia Pac: Australia, Japan, and emerging markets Asia. †EM Asia: emerging markets Asia = China, India, NIEs, and
ASEAN. ‡NIE: Newly industrialized economies = Hong Kong, Singapore, South Korea, Taiwan; ‡‡ASEAN: Indonesia, Malaysia, Philippines, Thailand. 2 & 3. Source: BIS 4. Graph shows average ratio of nonperforming
assets to gross loans by region for banks within the Global Top 200 that have a stand-alone credit profile assessment in the 'a' category. Source: S&P Global Ratings.
25Key Asian Banking Systems Update
1. China: Interbank Spreads Widened After 2. India: Asset Quality Recovery Delayed Amid
Baoshang Bank Takeover In May Macro Headwinds
Megabanks JSCBs
Joint-stock commercial banks Nonperforming loans vs. total loans
City commercial banks Rural commercial banks
12%
4.0%
10% 9% 9% 9%
3.5% 8%
3.0%
4% 5%
2.5% 3%
2.0%
2012 2013 2014 2015 2016 2017 2018 2019F 2020F
3. Japan: Wafer-Thin Interest Margins Continue 4. Australia: Imbalances Ease
Applied interest rate on new loans Private sector borrowings from banks as % of GDP
Average interest rate on outstanding loans (stock basis) National house price index (inflation-adjusted)
1.5% 150
1.0% 100
0.5% 50
0.0% 0
2015 2016 2017 2018 2019F 2020F 2012 2013 2014 2015 2016 2017 2018 2019F 2020F
1. See “China's Bailout Of A Troubled Bank Isn't Surprising,” May 27, 2019. 2. NPLs--Nonperforming loans. F--Forecast. Sources: Reserve Bank of India, S&P Global
Ratings. 3. Sources: Government data, S&P Global Ratings. 4. Note: National house price index: March 2012=100. F--S&P Global Ratings forecast.
26Key Asian Banking Systems Update
1. ASEAN: Good Profitability But Downward 2. Hong Kong: Short-Term Money Flows Have
Pressure From Interest Rate Cuts Little Impact On Customer Deposit Balance
Aggregate balance before discount window (left scale)
2016 (left scale) 2017 (left scale) 2018 (left scale)
2019F (left scale) 2020F (left scale) 2018 Tier 1 ratio (right scale)
Total customer deposits of all AIs (right scale)
1000 16
14
3.0% 25% 800 Fed started 12
quantitative
HK$ tril.
10
Bil. HK$
20% 600 easing during GFC Fed started its
2.0% rate hike cycle 8
15% 400 6
10% 4
200
1.0% 2
5% 0 0
0.0% 0%
Indonesia Philippines Thailand Malaysia Singapore
4. Taiwan: Profitability Constrained By Low
3. Korea: Household Debt Growth To Moderate
Interest Rates And High Competition
Household debt (left scale) Net interest margin
Household debt-to-income (left scale) Pretax ROAA
Household debt growth (right scale) Provisions/ average assets ratio
16% 1.4%
190
1.2%
12% 1.0%
KRW 10 tril. %
140 0.8%
8% 0.6%
0.4%
90 0.2%
4%
0.0%
40 0%
2004 2006 2008 2010 2012 2014 2016 2018 2020F
1. Source: S&P Global Ratings. 2. Source: Hong Kong Monetary Authority 3. Source: Bank of Korea. F--S&P Global Ratings forecast. 4. ROAA--Return on average
assets. F--S&P Global Ratings forecast. Sources: Taiwan's Financial Supervisory Commission, Taiwan Ratings Corp.
27Credit Conditions: Latin America
– We expect another year of weak growth in 2020, with significant downside risks due to political tensions
and rising social protests in some countries.
– Brazil's recently approved pension reform is an important step in addressing the government's rapidly
rising debt levels, but further measures are needed to control public spending.
– We expect Argentina to default again at some point after the new administration takes office.
– We expect a rise in GDP growth in Mexico in 2020. However, the risks are mostly to the downside
because of the uncertainty that some of the government's policies have created, especially regarding
the energy sector.
S&P Global Ratings' Forecasts For Latin American GDP Growth
Baseline Scenario Downside Scenario
2017 2018 2019F 2020F 2021F 2022F 2019F 2020F 2021F 2022F
Argentina 2.7 -2.5 -3.0 -1.0 1.5 2.0 -4.0 -2.5 0.0 1.0
Brazil 1.1 1.1 0.8 2.0 2.2 2.5 0.5 1.0 1.2 1.5
Chile 1.5 4.0 2.4 2.8 3.0 3.0 2.0 2.4 2.5 2.5
Colombia 1.4 2.6 3.2 3.2 3.3 3.3 2.7 2.5 2.5 2.5
Mexico 2.4 2.0 0.4 1.3 1.7 1.9 0.2 0.6 0.9 1.0
Panama 5.3 3.7 3.5 4.0 4.5 5.0 2.5 3.0 3.5 3.5
Peru 2.5 4.0 2.6 3.0 3.2 3.5 2.0 2.5 2.8 2.8
Uruguay 2.6 1.6 0.5 1.5 2.3 2.8 0.2 1.0 1.8 2.0
Venezuela -15.7 -20.0 -20.0 -5.0 0.0 3.5 -30.0 -15.0 -5.0 -5.0
Latin America 0.9 0.4 -0.3 1.3 2.1 2.5 -1.2 0.0 1.0 1.2
Latin America ex. Venezuela 1.7 1.4 0.7 1.6 2.2 2.4 0.3 0.8 1.2 1.5
F--forecast. Source: S&P Global Economics. Note the Latin American GDP aggregate forecasts are based on three-year average (2015-2017) PPP GDP weights. Our GDP numbers are based on
seasonally adjusted series when available.
28Latin American Banks
Key Expectations
– Uncertain political dynamics, weakening investment and domestic demand, and volatile external conditions will curb
economic growth pace and credit demand.
– Modest credit expansion and pressure on asset quality, but mitigated by good provisioning coverage.
Key Assumptions
– As a result of the Fed's monetary policy, we expect the potential easing cycle in interest rates--in most countries--to
weaken banks' profitability with a lag of 12-18 months.
– Banks' operating performance in Brazil should remain fairly stable, while Mexico could face economic headwinds and
conditions in Argentina will remain weak for some time.
– Credit losses will remain manageable across the region.
Key Risks
– A prolonged period of poor economic growth--if political uncertainties prevail discouraging business and consumer
confidence--could mute credit demand and cause nonperforming assets to rise.
– Volatile deposits in Argentina could continue pressuring banks' funding.
– Venezuelan immigration could pressure employment and wages in countries such as Colombia, Peru, Chile, and
Argentina, potentially affecting asset quality.
– Even though banking losses related to cybersecurity are currently manageable, risks keep rising.
29Latin American Banks
1. Lending Growth To Converge 2. Stable Asset Quality With Downside Risk
Brazil Chile NPLs (%) 2016 2017 2018 2019F 2020F
Colombia Mexico 5%
15% Peru
4%
10%
3%
5%
2%
0% 1%
-5% 0%
2016 2017 2018 2019F 2020F Brazil Chile Colombia Mexico Peru Argentina Panama
3. Low Loan-To-Deposit Ratios 4. Sound Profitability Despite Challenges
2016 2017 2018 2019F 2020F 2016 2017 2018 2019F 2020F
1.4 60%
Return on equity (%)
1.2 50%
1
40%
0.8
30%
0.6
20%
0.4
0.2 10%
0 0%
Brazil Chile colombia Mexico Peru Argentina Panama Brazil Chile Colombia Mexico Peru Argentina Panama
F--S&P Global Ratings forecast. Source: S&P Global Ratings.
30Latin American Banks
1. Low Credit Penetration, Apart From Chile and
2. Comfortable Provisioning Coverage
Panama
100%
Total credit to GDP 2020F Brazil Chile Colombia Mexico
Peru Argentina Panama
80%
250
60% 200
150
40%
100
20%
50
0% 0
Chile Panama Colombia Brazil Peru Mexico Argentina 2016 2017 2018 2019F 2020F
3. Share Of Foreign Currency Loans Is Mainly 4. Regional Political Challenges Are The Main Drag
Directed To Exporters (Except in Peru) On Investor Confidence
Changes in baseline GDP forecast from 2Q 2019
2016 2017 2018 2019F 2020F 2019 2020
35%
Argentina
30%
Brazil
25% Chile
20% Colombia
Mexico
15%
Panama
10% Peru
5% Uruguay
LatAm 6
0%
Brazil Chile Colombia Mexico Peru Argentina -4.0 -3.0 -2.0 -1.0 0.0 1.0
F--S&P Global Ratings forecast. Source: S&P Global Ratings. 2. Provisioning coverage as measures by the ratio of loan loss reserves to nonperforming assets.
31Related Research
– Indian Financial Sector Braces For Fat Contagion Tail Risk, Oct. 23, 2019
– The U.S. Banking Sector Should Remain Stable Despite Easing Regulatory Oversight, Oct. 22, 2019
– European Banks Count The Cost Of Inefficiency, Oct. 22, 2019
– Top 100 Banks: Capital Buildup Is Slowing, Oct. 16, 2019
– ECB's 2019 Stress Test Confirms Eurozone Banks Have Adequate Liquidity, Oct. 10, 2019
– The Fed's Rate Cuts Will Likely Pressure U.S. Bank Spread Income And May Spark Greater Credit Risk, Oct. 8, 2019
– Asia-Pacific Financial Institutions Monitor 4Q 2019: Profitability Woes Weigh On Japan's Banks, Oct. 8, 2019
– What Will Change With The New Euro Short-Term Rate, Oct. 1, 2019
– Bail-In Debt Remodels The Risk Profile Of Bank Funding In Europe And North America, Sept. 26, 2019
– For German Landesbanken In 2019, The Risk Is Down, But Long-Term Questions Remain, Sept. 26, 2019
– What Volcker Rule Changes Mean For Bank Ratings, Sept. 24, 2019
– How To Say Goodbye To LIBOR Without Creating Market Chaos, Sept. 23, 2019
– The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis, Sept. 12, 2019
– Climate Change: Can Banks Weather The Effects, Sept. 9, 2019
– China Credit Spotlight: The Coming Exit Of Struggling Banks, Aug. 28, 2019
– The Future Of Banking: Virtual Banks Chase The Dream In Asia-Pacific, July 17, 2109
– The Future Of Banking: Will Retail Banks Trip Over Tech Disruption, May 14, 2019
– Europe’s Banks Must Step Up To Crack Down On Financial Crime, April 18, 2019
– Why Japan's Regional Banks Aren't As Profitable As German And U.S. Peers, March 11, 2019
32Analytical Contacts
Global FI Sector Lead North America
Emmanuel Volland BrendanBrowne
Paris New York
+33 1 4420 6696 +1 212 438 7399
emmanuel.volland brendan.browne
@spglobal.com @spglobal.com
Asia Pacific Western Europe
Gavin Gunning Elena Iparraguirre
Melbourne Madrid
+61 3 9631 2092 +34 91 389 6963
gavin.gunning elena.iparraguirre
@spglobal.com @spglobal.com
Latin America Middle East & Africa
Cynthia Cohen Freue Mohamed Damak
Buenos Aires Dubai
+54 11 4891 2161 +971 4372 7153
cynthia.cohenfreue mohamed.damak
@spglobal.com @spglobal.com
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