European, Middle East & African (EMEA) emerging market (EM) banks face rising risks due to weaker economic activity triggered by coronavirus and a fall in oil prices, a recent report from Fitch Ratings showed.
According to the ratings agency, 86 out of 100 EMEA EM bank ratings reviewed between March 12 and April 30 this year had negative rating actions.
These included 16 downgrades, of which 15 were recorded in Middle East and Africa, primarily in Oman, South Africa and Nigeria. 14 banks were placed on rating watch negative (RWN), 47 banks were assigned a negative outlook and 9 banks that previously had positive outlooks were assigned stable outlooks.
“Weaker economic activity will hit banks' asset quality and earnings and, in some cases, capital, although funding and liquidity will be mostly stable,” Fitch said.
“However, most ratings have been placed on Rating Watch Negative (RWN) or Negative Outlook (RON) rather than downgraded. This is because of expected economic recoveries from 3Q20, sound financial metrics going into the downturn and – in some cases – already low ratings,” Fitch added.
According to the report, support considerations were a secondary factor, with the negative actions on 18 banks driven by revised assessments of potential support. Considerations included weaker domestic sovereign credit profiles and rating actions on parent institutions.
Banks assigned a negative outlook could be downgraded if economic recoveries are delayed and the impact of the crisis on banks’ financial metrics, or on domestic sovereigns and bank shareholders in the case of support-driven ratings, is greater than envisaged in the rating agency’s baseline scenario, the report notes.
“The resolution of RWNs will largely depend on the trend in oil prices and their impact on certain oil-producing economies,” Fitch said.
(Writing by Gerard Aoun; editing by Seban Scaria)
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