Fitch Ratings says in the latest publication of its regular EM Banking System Datawatch that most major emerging market (EM) banking sectors will perform more weakly in 2014 than in recent years due to slower economies, higher rates, seasoning loan books and, in some cases, greater political uncertainty. However, bank credit metrics and ratings should be largely resilient, given mostly solid buffers and only moderate economic downturns. Downside risk is greatest in China and India, but has risen in Russia and Turkey.
Fitch expects continued robust credit growth in China in 2014, but at a slightly slower pace of 18% (2013: 22%), increasing credit/GDP to 232% (2013E: 217%). Underlying asset quality pressures will rise (although reported NPLs should stay low), hurting liquidity, but the authorities will likely prevent any prolonged tightness in money markets.
Indian banks' asset quality is likely to weaken further, with stressed assets (NPLs and restructured loans) to rise from 10% (at mid-2013) to around 15% during FY15 (ie by March 2015). State banks are most affected and may need Rs 3.8 trillion (USD 60 billion) of new equity by 2019 to achieve full compliance with Basel rules, although delayed implementation has reduced near-term capital pressure. In most other major EM Asia markets, Fitch is less concerned about loan seasoning given banks' significant buffers.
The economic slowdown in Brazil will continue to put moderate pressure on banks' asset quality and margins. Most large lenders should be resilient to these challenges, but state-owned banks and some mid-sized/small institutions are more vulnerable, given, respectively, recent rapid growth in non-core areas, and weaker funding and diversification. Fitch expects Mexican banks' asset quality to stabilise in 2014, and lenders in Chile, Colombia, and Peru should continue to perform soundly.
The outlook for Russian banks has weakened, as geopolitical uncertainty and reduced business confidence pressure economic growth (2014F: 0.9%; risks to the downside). However, bank refinancing risks are manageable, recession is not our base case and banks' credit metrics should not deteriorate markedly. Downgrade risk is focused on sovereign-linked bank ratings, which currently have negative outlooks.
Turkish banks will face a tough year of weakening asset quality, tighter margins and lower growth, as loan books season against a background of higher rates, a weaker currency, a slower economy and political uncertainty. However, most banks can absorb moderate stress, and downward rating pressure should be limited.
Sector NPLs remain high in Slovenia even after the 'bad bank' transfers in 4Q13, limiting upside for low bank ratings. Asset quality declined again in Romania in 2013, but shows signs of plateauing in other weak Central and Eastern Europe markets.
Robust oil prices and government infrastructure spending should support economic and bank performance in most Gulf Cooperation Council markets. Problem loans have generally peaked and capital and liquidity are robust. Positive trends are most evident in UAE and Kuwait (potentially pushing up Viability Ratings) and Saudi Arabia.
