TEXT-S&P: Brittle macroeconomic recovery weighs on global banks

Thu Jan 17, 2013 8:53am EST

Jan 17 -

-- The brittle macroeconomic recovery in key markets will, in our view, remain the main pressure on bank ratings for the foreseeable future.

-- We believe that most governments will remain supportive of senior bank creditors at least until economies and balance sheets recover--probably three to five years.

-- The transition toward new regulations compounds the challenges for banks as they adapt their business models and balance sheets to the new environment.

Fragile conditions in key economies and the transition to stricter regulation will continue to weigh on banks globally through 2013. We expect a moderate pick up in global GDP growth this year, but the recovery is likely to be more protracted and uneven than in previous cycles and represents a tough operating environment for the global banking sector. As we expected, banks are generally repairing and strengthening their balance sheets; however, in our opinion many still have a long way to go to adapt fully to the future economic, market, and regulatory environments. For more information, see "Global Banking Risks And Credit Trends Dominated By Fragile Economies, Evolving Regulations, And Government Support," published today on RatingsDirect on the Global Credit Portal.

As the financial crisis has dragged on, governments and central banks have plowed unprecedented capital and liquidity support into their banking systems, which underpins a large number of our ratings on systemically important financial institutions. We think this extraordinary external support will be needed for some time yet, particularly in Europe, and will continue to be a major factor for many of our ratings. In our view, supportive governments cannot afford to allow systemically important banks to default on senior debt or interrupt deposit flows in the current environment, due to the severe impact this would have on financial stability and overall economic growth. Therefore, in the event of a further economic downturn, we would expect greater pressure on stand-alone credit profiles (SACPs) than on counterparty credit ratings.

Weakness in the operating environment for banks is most apparent in Europe, where financial turmoil has turned into an economic malaise amid widespread public and private sector deleveraging. While we think the eurozone is very gradually beginning to implement structural reforms to improve financial integration, growth in the region will continue to lag other parts of the world. The U.S. has stepped back from the fiscal cliff but difficult decisions on sequestration (spending cuts) and the debt ceiling are due in the coming months, and longer term fiscal sustainability has yet to be addressed. By historical standards, we do not expect the U.S. recovery to be particularly robust, with GDP growth at 2.2% this year according to our base-case forecasts. Equally, we expect GDP growth in China to slow from 2005-2011 levels but the threat of a hard landing appears to have diminished. Latin America has proven to have some resilience to the global economic problems, but is not immune. Most countries in the region have maintained an adequate economic performance after the crisis, but dependence on exports and capital inflows, along with low income levels, continue to make the region vulnerable to external shocks.

Against this testing background, we see evidence that banks are making progress in improving their capital and liquidity positions to satisfy emerging regulatory requirements and meet investors' expectations. Ultimately, these changes may support our assessment of their SACPs. The transition to more sustainable balance sheets and business models, in some cases, is taking longer than previously expected because of weak operating conditions, compounded by a period of regulatory uncertainty as inconsistent national regimes develop.

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