Banking Risk Monthly Outlook: August 2022
Our banking risk experts provide insight into the events that will impact the emerging markets financial sector in August. Strong points:
- Bangladeshi state-owned banks are expected to continue to have a funding shortfall
- High energy prices will likely cause asset quality to deteriorate in Pakistan
- Polish banks anticipate significant one-time costs related to credit holidays, which will reduce profitability in the third quarter of 2022 and increase the risk for capital buffers
- Exchange rate depreciations affecting direct and indirect foreign exchange risks in Argentina, Chile and Costa Rica
- Gulf leaders in the fintech space may seek to tighten regulations as the sector gains prominence
- Zambia’s creditors should commit to the debt relief needed to obtain IMF financing, which should reduce dependence on commercial bank financing
Bangladeshi public banks are expected to continue to have a funding shortfall.
The government of Bangladesh has requested a $4.5 billion loan from the IMF to support its budget and current account deficit. This will suggest that capital injection into state-owned banks will not occur at least in 2022. State-owned banks in Bangladesh already have a capital adequacy ratio below the required level, at 6.8% in March 2022, and a growing bad debt provisioning deficit. Looking ahead, over the next few months, IHS Markit expects credit growth to slow due to deteriorating asset quality in Bangladeshi banks, especially state-owned ones, in due to particularly poor credit standards in the past.
High energy prices are likely leading to a deterioration in asset quality in Pakistan.
Pakistan’s power generation and transmission companies have always needed government subsidies to survive due to state-imposed oil and gas price caps. Although these maximum prices were allowed to increase by 20-45% in June and July, the government continued to require IMF support (with the last injection in July 2022). Rising energy prices will likely impact the ability of these energy companies to repay bank loans, which will impact asset quality.
Polish banks foresee large one-time costs related to credit holidays, which will reduce profitability in the third quarter of 2022 and increase the risk for capital buffers.
The Polish parliament ratified the implementation of support measures for borrowers in view of the increase in cost pressures for households in mid-July. Subsequently, Polish banks announced the estimated costs for eligible mortgage borrowers who choose to suspend mortgage payments, which is possible for up to four months during the second half of 2022 and for another four during 2023. Costs significant should be a unique case given the non-nuanced approach to credit holidays that makes eligible all borrowers with domestic currency mortgages. Third-quarter financial results are expected to reach negative territory, unheard of for some banks since the global financial crisis; IHS Markit estimates that for the ten largest banks (excluding Bank Gospodarstwa Krajowego), costs are expected to be between 6.9% and 10.1% of equity, based on June 2022 data. However, the Polish sector has sufficient buffers with a capital adequacy ratio of 18.5% and a regulatory Tier 1 capital ratio of 16.6% in March 2022, although some banks, such as Bank Millennium, are expected to fare less well and temporarily dip below minimum capital requirements.
Exchange rate depreciations affecting direct and indirect foreign exchange risks in Argentina, Chile and Costa Rica.
Heightened political uncertainty (and sovereign distress in the case of Argentina) led to a significant depreciation in the exchange rates of Argentina, Chile, Colombia and Costa Rica. In the case of Chile and Colombia, the exchange risks are limited given the low dollarization of these countries (and also, in Colombia, there has been a recovery in the exchange rate in the last month). However, Costa Rican borrowers with dollarized debt were already in deep trouble; this depreciation increases the probability of a higher depreciation over the rest of the year in the country. Perhaps the most affected country is Argentina, where the depreciation is likely to be even higher, given that the black market rate is much lower than the official rate. So far, exchange risks have been limited in this country given the low dollarization of credit and the size of foreign exchange reserves for deposits in dollars; however, a weakened central bank increases the likelihood of bank reserves being used as funds to stabilize the currency.
Gulf leaders in the fintech space may seek to tighten regulations as the sector gains prominence.
Saudi Arabia, UAE, Bahrain and Qatar – the markets that have been regionally most active in attracting new companies operating in the fintech space – are expected to maintain a conservative approach to regulating the nascent sector even if they compete for new capital and technology. Saudi Arabia, for example, which has seen very rapid growth in the number of companies registered since the launch of FinTech Saudi in 2018, could seek to better define paid-in capital and other macroprudential requirements to provide more clarity to potential entrants while maintaining regulations. charges low enough to encourage growth. Unlike in the UAE, where digital banks are required to partner with existing commercial banks, facilitating their growth, Saudi banks have so far been slow to partner in the fintech space. We expect Saudi banks to enter this space this year as they seek ways to increase funding to maintain credit growth.
Zambia’s creditors should commit to the debt relief needed to obtain IMF financing, which should reduce reliance on commercial bank financing.
Zambia’s bilateral creditors are expected to issue a statement outlining the exact amount to be provided in debt relief, a necessary step to pave the way for Zambia to secure a $1.4 billion credit facility from of the International Monetary Fund (IMF). Access to the IMF credit facility will meet part of the government’s financing needs for 2022, easing the pressure on commercial banks to buy additional government debt, which crowds out private sector lending. In addition, the debt restructuring will improve Zambia’s debt sustainability, which in turn will contribute to the quality of the bank’s assets, given that part of the banking sector’s NPLs result from government arrears. .
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.