BRICs banks could come under pressure: S&P

Our Bureau Updated - March 12, 2018 at 11:48 AM.

Banks in the world's largest developing economies of Brazil, Russia, India, and China (BRICs) could come under pressure over the next 12-24 months, according to Standard and Poor's Ratings Services.

The global rating agency, however, expects the BRIC banks' ties with the government to underpin their credit profiles.

S&P said a slowdown in growth in China, Brazil, and particularly India, could weaken the asset quality and earnings of banks in these countries.

Mirrors sovereign rating outlook

The situation in Russia is somewhat different. Russia's banking industry is likely to continue its recovery from a severe recession in 2008-2009 for at least the next two years.

The negative outlook on the banks in India (BBB-/Negative/A-3) reflects the negative outlook on the sovereign rating.

"We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation," said S&P in a report.

"Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies," said Standard & Poor's credit analyst, Ms Geeta Chugh.

Outlook on large banks

The agency's rating outlook on the large banks in Brazil, Russia, and China is stable, reflecting its expectation that these countries will maintain their good economic resilience to a global slowdown. Further, their banking sectors will experience only a moderate deterioration in asset quality and earnings.

"State ownership and control of a significant part of the banking industry in BRIC countries is a critical rating factor. Such a link is integral to the economic model of these countries," said Ms Chugh.

Govts may step in

S&P expects 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.

In China and Russia, banks' ties with the government mean that the ratings on the largest banks are higher than their standalone credit profiles. State finances in both countries are strong, and consequently strengthen government capacity and inclination to support the banks, particularly in China.

Brazilian banks - least risky

"Among BRIC banking systems, the Brazilian banking sector is the least risky overall as reflected in our Banking Industry Country Risk assessments," said Standard & Poor's credit analyst Mr Sergio Garibian.

Even though Brazilian banks' asset quality is expected to erode further in the second half of 2012, S&P expects the erosion to be moderate given the low unemployment in the country.

S&P said, 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.

Published on July 25, 2012 07:39