Dagong Global Credit Rating Group Co., Ltd (hereinafter referred to as “Dagong”) released Dagong's 2018 Credit Outlook for the Global Banking Industry On January 30th, forecasting the trend of credit risks in 2018 global banking industry under the environment of monetary normalization and regulation reforms.
In 2018, credit risk of global banking industry is expected to be stable with slight decline, but credit risk characteristics differ across major regions. The credit risk of US banking industry is expected to ameliorate, with improving asset quality and recovering profitability. The credit risk of European banking industry ranks top in the world as its profitability and asset quality are difficult to pick up in the low interest rate environment, albeit Europe’s intention to exit quantitative easing. Under stringent regulation, profitability and liquidity of China’s banking industry are under pressure, but risks are controllable. As to other emerging market countries, credit quality of their banking industry remains fragile given the deteriorating asset quality and tightened liquidity.
The main analysis is shown below:
I. Credit risk of US banking industry keeps ameliorating with improving profitability, asset quality, capital strength and risk-resisting ability.
The Federal Reserve’s (Fed’s) interest rate hike and the trend of financial deregulation will provide a favorable operating environment for US banking industry in 2018. Bank’s profitability is expected to increase further. Driven by the recovery of real economy and rebound of corporate’s financing demand, banks increase credit supply and their asset quality is also improving. The enhancement of banks’ capital strength ensures a high level of risk-resisting ability.
II. Credit risk of European banking industry is expected to persist. Although the profitability is improving slowly, problem of non-performing loans remains outstanding.
In 2018, the profitability of Europe's banking industry will remain low, constrained by ultra-loose monetary policy and rising regulatory costs. Benefiting from the economic recovery, the non-performing loan ratio of the banking industry is trending downward, but still ranks the highest globally. In the future, large scale of non-performing loans and low coverage ratio will continue threatening the stability of European banking industry. Meanwhile, banks of certain countries have weak capital strength and inadequate risk-resisting ability; thus risks can be easily transmitted to other countries due to frequent cross-border operations of major banks and develop into regional systemic financial risks.
III. Asset quality of China’s banking industry remains stable. Credit risks are generally controllable under stringent regulation, though profitability and capital adequacy are slightly under pressure.
In 2018, stringent regulation will remain the theme of China’s financial policies, and will significantly affect the development of the banking industry. The central bank (the People’s Bank of China) will maintain the robust neutral monetary policy, pushing up the interest rate in financial market. Rising risk management awareness under stringent regulation ensures the steady credit expansion, but increase in compliance cost due to strengthening of regulation will continue to constrain the profitability of banks. Meanwhile, the asset quality of banks will remain stable given the combination of measures such as the adjustment of banks’ credit structure, the intensified disposal of non-performing assets, and the tightening of lending conditions. The overall credit risk of China’s banking industry is controllable.
III. The banking industry in emerging markets is expected to see some profitability improvement, but its credit quality is still challenged by large non-performing loans, pressures on capital adequacy, and uncertainties in external environment.
In 2018, slow economic recovery and easing of monetary policy ensures a fair profitability of the banking industry in most emerging market countries, but the improvement of profitability is limited by factors such as Fed’s interest rate hike and political risks. Large non-performing loans and pressures on capital adequacy remain the major threats to the stability of the banking industry in most emerging market countries. Improvement of credit quality is under pressure.