These Key Risks Could Make 2021 The Toughest Year For Global Banks

The global economy has suffered severe disruption due to the COVID-19 pandemic. The year has been particularly hard for banks but next year maybe even tougher, said S&P Global Ratings in a report series published today (November 17). ''Support measures that have steadied banks and helped borrowers survive cannot last forever. The expected progressive withdrawal of such support in 2021 will reveal a truer picture of underlying bank asset quality, even as economies start to recover,'' said Gavin Gunning, Credit Analyst, S&P Global Ratings.

According to S&P Global Ratings, while the profitability will stay depressed in 2021, many banks are in better shape to withstand the pressure as compared to 2009. The strong fiscal support for economies is benefiting banks, the funding markets are accommodative, and banks have been significantly provisioning to deal with the weakening asset quality.

Ratings on the banks reflect the long road ahead, with about a third of bank ratings currently on a negative outlook. Since the pandemic began, S&P took 236 negative rating actions related to COVID-19, the oil price shock, and other market stresses on banks globally, about three-quarters out of which were outlook revisions. "The recovery of banking systems globally to pre-COVID-19 levels will be slow, uncertain, and highly variable across geographies," said S&P Global Ratings credit analyst Emmanuel Volland.

The four key risks for global banks to watch out for in 2021 are as follows:

• Economic disruption from COVID-19 gets worse or lasts longer than the base-case assumption.
• Short-term supports to banks and borrowers may leave longer-term overhangs.
• A likely surge in leverage and anticipated higher corporate insolvencies.
• A weakening in property - could punish bank credit quality.

"Twelve months ago, before COVID-19 struck, banks faced the new year with relative calm. The scenario for banks heading toward 2021 is a sharp contrast," said Emmanuel Volland. "For many banking systems, we do not envisage recovery to pre-COVID-19 levels until 2023 or beyond,'' he added.

Some of the biggest banks across the world include Bank of America Corp., JP Morgan Chase & Co., Japan Post Holdings Co. Ltd., Wells Fargo & Co., and few others.