S&P warns of 'significant risks' to bank credit quality

The report, titled The 2017 Global Credit Outlook For Banks, highlights protracted global economic recovery, heightened political uncertainty, low interest rates and the still-evolving regulatory landscape as key risk factors weighing on the operating environment for banks globally.

After an extended period of material balance sheet strengthening for most international banks, S&P believes that low economic growth, pressure on margins, and growing competition from non-bank players will keep pressure on the long-term sustainability of banks' business models.

“In our view, constraining factors for bank ratings in 2017 include weaker prospects for earnings growth globally, potential risks related to Brexit and more generally increased political risks,” S&P Global Ratings said in its report.

A snapshot of banking industry country risk assessment (BICRA) trends - which reflect S&P’s view of at least a one-in-three probability that economic risk or industry risk of operating in a banking environment could change - suggests that 11 of the 20 largest global banking markets face negative pressure.

Only two (Italy and Spain) have positive trends and seven are stable (Mexico, Singapore, France, Korea, the US, the Netherlands and Switzerland).

“Out of the 85 banking systems where we publish BICRAs, 47 per cent of banking systems have stable trends (on both economic and industry risk), 42 per cent have negative trends (on one of the two factors) and 11 per cent have positive trends (on one of the two factors,” the report said.

Since its last global credit outlook for banks published in July, the proportion of banks with a negative outlook increased in Asia-Pacific and Latin America.

Earlier this month, S&P Global Ratings revised its outlook for 25 Australian financial institutions and three banks after warning of rising risks due to high private debt and residential property prices.

The credit ratings agency said that economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months.

[Related: S&P revises bank credit outlook to 'negative' amid housing risks]