Global banks could see credit losses of about $2.1 trillion for 2020 and 2021 spurred by the Covid-19 pandemic, with $1.3 trillion for this year, more than double the 2019 level, warned S&P Global Ratings.

While around 60 per cent of the credit losses will arise in Asia-Pacific, the highest relative increases – more than double on average compared with 2019 – will occur in North America and Western Europe, it said.

In a report, The $2 Trillion Question: What’s on the Horizon for Bank Credit Losses, S&P observed that the pandemic and responses to it will weigh heavily on bank asset quality for years to come.

Credit analyst Osman Sattar expects pre-provision earnings over the period will be able to absorb these increases (in credit losses), though further upticks would weigh on banks’ ratings; inevitably, some banks will incur net operating losses.

“In line with our economists’ forecasts of a broad, strong economic recovery into 2021, we expect losses in that year will fall back to a more manageable $0.8 trillion, though this would still be more than one-third above the 2019 level,” he said.

Benign credit losses

Indeed, S&P expects that 2019 marked the end of a multi-year period of benign credit losses for banks globally.

Sattar said: “As the aftermath of the 2008-2009 financial crisis showed, delays in the recognition of credit losses by banks, or a lack of transparency in reporting such losses, could undermine investor confidence in banks and may delay the path to recovery for some countries.”

According to the report, the duration and severity of the global downturn and the strength of the recovery will shape bank asset quality, and key drivers and differentiators will be effective fiscal support from governments to their economies, as well as banks’ forbearance measures and financial reporting transparency.

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