Financial sector credit outlook dims amid uncertainty

Against the backdrop of rising global interest rates and dimming economic prospects, improvements in credit quality at global financial institutions is slowing, Fitch Ratings says.

Of the rating actions taken on global financial institutions in the second quarter, positive actions continued to outweigh negative actions, Fitch said in a new report. The ratio of positive to negative credit outlooks and watches for global financial firms was in line with pre-pandemic levels as of the end of June.

Positive rating actions were driven by “resilient profitability and asset quality/performance, strengthened capitalization and lower leverage and improved company profiles,” Fitch said.

Conversely, negative rating actions were triggered by challenges to firms’ profits, liquidity and capital.

For banks, downgrades exceeded upgrades in the second quarter, Fitch said. The primary reason was weaker profits and capital levels amid a deteriorating operating environment in some emerging markets.

Yet the rating activity for non-bank financials was net positive, led by positive actions on traditional investment managers in North America and Europe, it noted.

In the insurance sector, rating action was balanced, Fitch said, with negative actions in emerging markets offset by positive rating actions in developed markets.

Looking ahead, the report noted that risks are skewed to the downside amid deteriorating economic indicators, particularly in emerging markets.

“Inflationary pressures and tighter monetary policies from most major central banks have prompted a further deterioration in the global growth outlook. The vast majority of [financial] sector outlooks remain neutral, but risks are skewed to the downside, particularly in emerging markets, where some sovereigns face meaningful challenges to creditworthiness,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.