Related Fitch Ratings Content: Forbearance Distorts Developed Market Bank Credit Costs
Fitch Ratings-London-30 October 2020: Bank provisions in developed markets around the world have jumped due to the coronavirus pandemic, but not always in line with the size of the economic shock in each jurisdiction, Fitch Ratings says in a new report. We expect provisioning to remain high in 2021 relative to historical averages, despite pronounced front-loading in many markets in 1H20, before a reduction in 2022.
All else being equal, provisioning increases should be highest in economies hit the hardest by the pandemic. But increases in loan loss reserves since the onset of the pandemic show regional trends that reflect other factors too, including different local regulations, forbearance practices and economic uncertainty, as well as portfolio composition, model parameters and management judgement.
North American banks have seen large increases in loan loss reserves, due in part to the 1Q20 adoption of Current Expected Credit Loss accounting. This is more stringent than IFRS 9 as it requires lifetime expected credit loss provisioning for all loans. In Western Europe, increases in loan loss reserves have been generally well below US levels as a percentage of loans, but have varied widely by country and by bank, with varying degrees of management overlays. In developed market jurisdictions in the Asia-Pacific region, increases have been lower, reflecting milder economic shocks and previous solid economic growth.
We expect further credit cost increases to be concentrated in jurisdictions where provisioning has lagged behind the economic shock. Lingering fallout from the economic contraction will strain borrowers’ repayment capacity in many markets, particularly as authorities withdraw support and forbearance measures. Accordingly there are Negative Outlooks on a large proportion of bank ratings. Unemployment will be a key factor for banks with unsecured consumer loan books.
The report “Forbearance Distorts Developed Market Bank Credit Costs” is available at www.fitchratings.com or by clicking the link above.
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