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Our banking risk experts provide insight into events impacting
the financial sector in emerging markets in May.
Refusal to lower deposit interest rates amid potential falling
loan prime rate will affect smaller banks' interest margins in
mainland China
Higher energy prices and tight fiscal finances in Pakistan will
likely drive up power-sector non-performing loans (NPLs)
New banking sector support measures in Europe owing to
increased cost pressures
Fresh capital controls or tightening of existing controls in
Eastern Europe and Central Asia
Further details on the privatization process of Ecuador's Banco
del Pacífico
Spill-over effects from Russia-Ukraine conflict to affect
Middle East and North Africa banking sectors unevenly
Operational liquidity strains in the Nigerian banking
sector
Profitability of smaller banks in Mainland China likely
to be affected by lower interest margins.
Smaller banks have yet to follow large banks in lowering their
deposit interest rates. Larger banks' lowering of deposit interest
rates will likely help to lower bank lending interest rates and
therefore the loan prime rate, which is calculated using both
banks' lending rates and the central bank's policy rate. The lower
loan prime rate will affect smaller banks' interest margins and
therefore profitability; however, this will likely help smaller
banks' loan-to-deposit rate to remain stable.
Credit risk associated with energy production in
Pakistan.
Production and transmission of energy account for around 15% of
total loans in Pakistan. Although currently, the NPL ratio for the
sector remains historically low at 5.1%, it has been rising
steadily since 2020. The higher energy prices and continued budget
deficit will potentially delay subsidies payments from the
government to energy companies. This in turn will limit energy
companies' abilities to pay banks as they rely on these subsidies
payments to remain liquid; ultimately, this will cause a rise in
the overall NPL ratio.
Introduction of new banking sector support measures in
Europe.
New banking sector support measures could be introduced
following the expiration of official pandemic-triggered loan
moratoriums in many countries across Europe at end-2021.
COVID-19-related borrower support measures have so far prevented a
sharp spike in NPLs, although increasing cost pressures for
borrowers via higher energy costs, food prices, and looming
interest-rate hikes threaten to strain debt-servicing abilities
across Europe, particularly for countries such as Bulgaria,
Hungary, Poland, and Romania, which have elevated shares of
troubled loans (Stage 2 plus non-performing loans). In response to
potential asset-quality pressures, Poland announced new mortgage
borrower support measures at the end of April, including a
four-month credit holiday without interest-rate accumulation.
Meanwhile, Romania has extended its European Central Bank (ECB)
repo line arrangement to January 2023 and is reportedly mulling the
introduction of a loan-repayment moratorium. We expect further
banking sector support measures targeted at borrowers or new
lending to be introduced by more Emerging European authorities -
and potentially new ECB moratorium guidelines - in the near
term.
Exchange-rate fluctuations to encourage temporary
foreign exchange controls in Eastern Europe and Central
Asia.
Implications from the ongoing Russia-Ukraine war have negatively
affected surrounding economies linked by direct trade and oil
imports. Moreover, the lower foreign exchange supply in Eastern
Europe and Central Asia (EECA) markets has increased pressure on
the local currency markets across the region. With countries such
as Kyrgyzstan and Kazakhstan having recently tightened foreign
exchange controls, in the latter exports of large sums of foreign
currency cash and gold are prohibited. The exchange rate (local
currency unit per US dollar) is forecast to reach an average of
54.07% year on year (y/y) at end-2022 in Eastern Europe and Central
Asia versus 0.36% y/y a year prior. Given the dollarized nature of
many Eastern European and Central Asian banking sectors, the
ongoing currency depreciations, and the implications for borrower
debt servicing and loan forbearance, it is likely that fresh
capital controls will be implemented, or existing controls will be
tightened further.
Further details on the privatization process of
Ecuador's Banco del Pacífico.
In January 2021, the president of Ecuador's state-owned bank
Banco del Pacífico announced a schedule for reaching the sale of
the institution. The government took over the bank after the 1999
banking crisis and, because of the lack of political support, it
has been unsuccessful at privatizing it since. However, given the
country's tight fiscal position, it is expecting to sell the bank
by the end of the year. According to the president of the bank, by
the end of May, there should be some offers for Banco del Pacífico.
We expect further details of this through the course of the
month.
Spill-over effects from Russia-Ukraine conflict to
affect Middle East and North Africa banking sectors
unevenly.
At the regional level, Middle East and North Africa countries,
particularly Gulf oil exporters, are projected to achieve stronger
economic growth as a result of higher world oil and gas prices that
will channel through to rising consumption, exports, and real fixed
investment spending. Even if NPLs edge up slightly following the
removal of COVID-19 forbearance and support measures, this improved
economic outlook will hold down peak NPLs and provide further
impetus for authorities to remove remaining COVID-19-era support
measures for banks and bank borrowers. More downside risk is
present in already fragile Middle East and North Africa economies,
such as oil importers in North Africa, that will see rising food
and energy prices widen current-account deficits at the same time
that tightening monetary policy in advanced economies increases the
risk of net capital outflow, putting downward pressure on local
currencies and imposing serious financing challenges. Significant
downside risk thus is present for these countries' NPL forecasts,
and a targeted extension of COVID-19-era forbearance measures, like
those already announced for tourism-sector and SME borrowers in
Tunisia and Morocco, is likely.
Operational liquidity strains in the Nigerian banking
sector.
The Nigerian banking sector has experienced operational foreign
currency liquidity strains since 2015, following the plunge in
crude oil prices in 2014 and 2020 given the country's high reliance
on crude oil exports. Although crude oil prices have improved,
production continues to lag because of operational challenges,
hindering export earnings that are much needed to ease foreign
currency shortages. Contradictory central bank policies add to a
decline in investor confidence, further exacerbating foreign
currency liquidity strains in the market, which raises concerns of
banks' ability to honor foreign currency obligations.
Encouragingly, Nigeria's banking sector shows a modest proportion
of foreign liabilities to total funds, at 8.9% in December
2019.
Posted 06 May 2022 by Natasha McSwiggan, Senior Economist, Banking Risk, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
