London/ New York – Fitch Ratings has assessed the rating vulnerabilities of global financial institutions (FIs) during a coronavirus downside scenario in a recently published report.
In the report, Fitch assigns vulnerability scores to the major FI sub-sectors to show their potential sensitivity to a severe coronavirus downside scenario. The scenario is only used to test rating sensitivities that we publish in rating action commentaries, and is not a reflection of our current rating expectations. The downside scenario includes a prolonged health crisis resulting in depressed consumer demand and a prolonged period of below-trend economic activity that delays any meaningful recovery to beyond 2021.
Downside sensitivity scores have also been applied by other Fitch teams, and a cross-sector heat map was published on 27 April 2020.
We show rating vulnerability scores under the downside scenario for each sub-sector on a scale from ‘1’ (virtually no impact, no rating changes) to ‘5’ (high impact, most or all ratings negatively affected). The sub-sectors in different regions are based on the FI portfolio segmentation in our cross-sector heat map, which comprises banks of varying sizes and a variety of non-bank FIs, insurance and funds and asset management sub-sectors.
The majority of FI sectors in North America, EMEA, APAC and LATAM are assigned a score of ‘3’ (medium impact) and ‘4’ (medium to high impact), due to the prolonged nature and severity of the downside scenario. Heavy Outlook and Rating Watch activity are probable for about 77% of FI issuers, as well as numerous ratings changes.
Rating downgrades are viewed as most likely under a score of ‘5’, which is assigned to larger LATAM banks, European Global Trading and Universal Banks, aircraft lessors globally and US- and APAC-based private-equity collateralised fund obligations. LATAM emerges as the most vulnerable region, due to the large number of LATAM sovereigns with negative outlooks, which are therefore exposed to further potential negative sovereign actions.
We are continuously updating our assumptions and ratings under our central baseline scenario, with special reports issued that summarise the key regional rating actions taken. The baseline scenario assumes a short but severe global recession with recovery starting in 3Q20 as the coronavirus crisis subsides.
The full report “Coronavirus Downside Scenario: Global Financial Institutions Risk Heat Map” is available at www.fitchratings.com or by clicking on the link above.