Banks in US, Europe, Japan will not recover to pre-pandemic strength until 2023: S&P

September 24, 2020.

Banks in the U.S., Europe and parts of Asia will not return to pre-pandemic levels of credit strength until 2023, S&P ratings said Wednesday, warning the sector may take years to recover after the launch of a successful vaccine.

The New York-based financial ratings agency said lenders in the U.S., U.K., Germany, France, Russia, Spain, Italy, Australia, Brazil and Indonesia are all expected to face a long road to recovery due to higher rates of coronavirus infection.

Meanwhile, banks in less-afflicted areas including China, Hong Kong, Singapore, South Korea, Canada and Saudi Arabia are likely to regain full strength sooner, by the end of 2022, S&P said. Globally, lenders are expected to sustain total credit losses of $2.1 trillion for 2020 and 2021, the ratings agency added. 

“Banks will likely strain to claw their way back to 2019 profit levels,” S&P said. 

Even if 2021 brings the introduction of a successful coronavirus vaccine and a full-throttle global economic rebound, the ratings agency said banks’ credit strength in even the most successful countries would suffer from a lag. 

“Stabilization and recovery may take a full 18 months or more after an economic rebound,” S&P said of the banking system, including in better-performing countries like China and South Korea. 

Banks in three other major economies are facing even bleaker outlooks than the U.S. and Japan, S&P said. Indian, Mexican and South African banks are also not expected to recover until after 2023. 

India currently has the second-highest number of coronavirus infections after the U.S. and saw its economy shrink an eye-watering 24% year-over-year in the second quarter. Mumbai-based , among the nation’s largest banks, teetered near insolvency earlier this year. 

“Operating conditions have deteriorated through the crisis,” S&P said of India. “The country entered the pandemic with an overhang of high nonperforming assets.”

In a sign of optimism about Mexico, the nation’s largest lender BBVA revised its full-year revenue forecast upward yesterday, citing the expiration of loan deferrals and a better-than-expected recovery in retail lending. Yet S&P maintains the country’s recovery “will likely be much further out” than that of other economies. 

The red-hot state of the global economy in 2019 means that banks face a high bar to reach pre-pandemic strength. 

“We do not view 2019 as typical with ‘normal’ metrics for many jurisdictions,” S&P said. “It was, rather, a strong year at the tail end of a long economic upcycle. Metrics would more quickly return to their pre-pandemic levels if those levels were not so strong. This is especially the case for credit losses in developed-market banking systems, which were atypically low in 2019.” 

Since March, S&P has taken 234 negative rating actions on banks and 101 negative rating actions on nonbank financial institutions. 

“The hit on financial institutions globally has been unambiguously negative,” S&P said. “Even for those jurisdictions that have been more resilient, our outlook for banking sector credit metrics as well as metrics applicable to individual banks are uniformly weaker.”