Global financial sector’s credit outlook improves

The credit conditions for global financial institutions are continuing to improve as the economic recovery gains traction, Fitch Ratings says.

The rating agency reported that the mix of credit rating outlooks has continued to trend toward pre-pandemic levels.

“The outlooks on global financial institutions’ ratings are increasingly stable as economies continue to recover from the pandemic,” it said.

As a result, the sector’s outlooks have stabilized, as concerns about financial institutions’ balance sheets have “abated,” Fitch said.

For example, in the fourth quarter of 2021, almost two-thirds (65%) of ratings actions in the sector led to no change, while 15% were revisions from a negative outlook to stable.

The insurance sector had the highest proportion of upgrades and changes to positive outlooks or watches in the fourth quarter, Fitch said, “mostly driven by the upgrade of Italy, improving financial performance, and M&A.”

As a result, the insurance sector now has more ratings on positive watch/outlook than on negative watch/outlook for the first time since the pandemic began.

However, both banks and non-bank financial institutions continue to have a higher proportion of negative watches/outlooks, Fitch noted.

That said, banks saw positive rating actions in the fourth quarter, due to improved sovereign ratings, stronger credit profiles, and M&A, the firm reported.

Similarly, non-banks had positive actions driven by “improved company profiles, better funding conditions and reduced leverage,” Fitch said.

“The banking and [non-bank] sectors still have some way to go towards a full recovery, partly dependent on sovereign developments,” Fitch said.

Additionally, it noted that M&A activity, which has been strong over the past 12 months, could cause some volatility in financial sector ratings.

The downgrade risks for global financials are “largely concentrated” in Latin America, the Middle East and Africa, Fitch said, whereas these risks have “significantly receded” in western Europe.

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.