Published: Wednesday July 25, 2012 MYT 1:48:00 PM
S&P sees BRIC banks under pressure in 12-24 months
KUALA LUMPUR: Standard and Poor's Ratings Services expects banks in Brazil, Russia, India, and China (BRIC) to possibly come under pressure over the next 12-24 months.
However, the international ratings agency said the BRIC banks' ties with the government would underpin their credit profiles.
The report, titled "Government support should enable BRIC banks to ward off economic headwinds," published on Wednesday said that a slowdown in growth in China, Brazil, and particularly India could weaken their banks' asset quality and earnings.
However, S&P said the situation in Russia was different and its banking industry was likely to continue its recovery from a severe recession in 2008-2009 for at least the next two years.
The ratings agency had a stable rating outlook for the large banks in the BRIC. This was based on its expectation these countries would maintain their good economic resilience to a global slowdown. It expected their banking sectors to experience only a moderate deterioration in asset quality and earnings.
The negative outlook on the banks in India (BBB-/Negative/A-3) reflects the negative outlook on the sovereign rating.
"State ownership and control of a significant part of the banking industry in BRIC countries is a critical rating factor," said S&P credit analyst Geeta Chugh.
She pointed out such a link was integral to the economic model of these countries. She expected governments to step in to avoid any abrupt and unexpected deterioration in local banks' financial condition. "Government ownership and economic development policies link the credit ratings on the largest BRIC banks to government creditworthiness," she said.
However, she believed Indian banks' asset quality to likely deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation.
"Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies," she added.
As for China and Russia, banks' ties with the government meant ratings on the largest banks were higher than their stand-alone credit profiles.
State finances in both countries are strong, and consequently strengthen government capacity and inclination to support the banks, particularly in China.
Meanwhile, S&P credit analyst Sergio Garibian said among BRIC banking systems, the Brazilian banking sector was the least risky overall.
"But even though we expect Brazilian banks' asset quality to erode further in the second half of 2012, we expect the erosion to be moderate given the low unemployment in the country."
On Russia, credit analyst Pierre Gautier pointed out the 2008-2009 recession in that country put an end to a long cycle of rapid credit expansion in the country.
"It resulted in high credit losses and loan restructuring, a reduction of cross-border debt, and active government support to banks and industrial companies. Growth rebounded robustly in 2011, when systemwide loans expanded 27%. We expect credit to expand about 15% in 2012 and 2013."
According to the report, whereas asset quality in Brazil, China, and India is weakening, problem assets in Russia are declining from the peak of the recession despite credit risk in Russia remaining very high.
The earnings of banks in China and Brazil could decline in 2012, but remain satisfactory. Returns in India and Russia in 2012 are likely to be at levels similar to 2011.