More than 100 financial institutions see credit rating downgrades since Covid-19

Ratings agency Fitch implemented 117 single or multi-notch downgrades of financial institutions between March and August this year, according to its Coronavirus Rating Action Tracker, demonstrating the scale of the impact the pandemic has had on the outlook for financial institutions, including banks and insurers, globally.

In addition, there were 407 instances of institutions being given an affirmed negative outlook (an indication of the potential rating direction for an institution over the coming one to two years). Of these 524 instances, 378 related to banking institutions.

The majority of the actions took place in April, with 59 out of 117 downgrades taking place and 246 negative outlooks being affirmed during that month.

MUFG, Société Générale and UniCredit were three of the largest institutions to see their long-term issuer default ratings downgraded during this period. Fifteen other global systemically important banks also saw Fitch revising, or affirming, their rating status to a negative outlook.

Regionally, institutions in the Americas appeared to be the most affected, with 236 financial institutions in the region seeing a downgrade or affirmed negative outlook in this period, compared with 215 in Europe, the Middle East and Africa and 73 in Asia-Pacific.

North America, with its large and diverse banking sector, saw 163 of its banks given an affirmed negative outlook between March and August, and 29 single or multi-notch downgrades.

A significant proportion of the actions related to investment-grade institutions. Of the 524 downgrades or negative outlooks, 376 applied to investment-grade institutions, compared with 148 speculative-grade.

There were also 110 instances of financial institutions being given an affirmed negative watch between March and August, with 81 of these instances relating to banks. A negative watch indicates there is a heightened likelihood of a rating change and is typically related to a specific event, and therefore may be resolved in a relatively short time period.

Given the scale of the economic fallout from the pandemic, banks across the globe have faced the prospect of having to deal with a significant volume of their loan books turning sour. 

Large banks in the US, for example, have set aside tens of billions of dollars in provisions for problem loans. In March, Fitch revised its rating outlook at a sector-wide level for US banks to negative, reflecting the challenges to profitability the sector is facing.

With countries across the world continuing to grapple with how best to control the spread of the virus, and significant questions remaining over the prospects for economic recovery in light of that challenge, the outlook for many banks remains highly uncertain. It is possible that further banks will see further ratings actions, such as negative downgrades, in the coming months.