Global Banks Country-By-Country Outlook 2024

Forewarned Is Forearmed

November 16, 2023

This report does not constitute a rating action

Primary contacts

Gavin Gunning
Melbourne
+61-3-9631-2092
gavin.gunning@spglobal.com
Emmanuel Volland
Paris
+33-14-420-6696
emmanuel.volland@spglobal.com
Alexandre Birry
London
+44-20-7176-7108
alexandre.birry@spglobal.com

Secondary contacts

Brendan Browne
New York
+1-212-438-7399
brendan.browne@spglobal.com
Cynthia Cohen Freue
Buenos Aires
+54-11-4891-2161
cynthia.cohenfreue@spglobal.com
Elena Iparraguirre
Madrid
+34-91-389-6963
elena.iparraguirre@spglobal.com
Osman Sattar
London
+44-20-7176-7198
osman.sattar@spglobal.com
Mohamed Damak
Dubai
+9-714-372-7153
mohamed.damak@spglobal.com

Contacts continued on page 106

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Key takeaways

• Our outlook for global banks remains steady. As of Oct. 31, 2023, 79% of bank rating outlooks were stable. This resilience is largely due to solid capitalization, improved profitability, and still sound asset quality.

• The weak economic outlook for 2024 will test banks' business volumes, asset quality, and financing conditions. Positively, most banks' earnings will continue to benefit from high interest rates.

• Key risks could intensify. Although not our base case, a marked deterioration of economic conditions in Europe, the U.S., and China is possible, while inflation remains high. The Russia-Ukraine and Israel-Hamas wars bring spillover risks.

• Commercial real estate (CRE) markets are suffering a significant downturn in some jurisdictions, with demand and prices falling, especially in the U.S., China, and some European countries. Related losses, although manageable, will be felt for a few years.

• We continue to anticipate increasing credit divergence. Pressure will be more pronounced for nonbank financial institutions (NBFIs) and entities with weak funding profiles or those directly exposed to geopolitical risk

Chart 1

Stable outlook trends but buffers may face a squeeze
Rating and outlook distribution

Data as of Oct. 31, 2023. Source: S&P Global Ratings.

Our outlook for the global banking sector for 2024 is for continuing ratings stability. We see limited potential for upside ratings momentum but several key risks that could negatively affect bank ratings should a downside scenario emerge outside our base case.

Banks will face headwinds and uncertainties. The weak economic outlook will test banks, as will the CRE sector--which is enduring a significant downturn in some jurisdictions--and high public and public sector indebtedness amid high interest rates. We anticipate that most bank ratings will remain resilient in the face of these key risks unless they intensify materially or become more entrenched.

We foresee the potential for increasing credit divergence across the global financial

landscape. While ratings on most financial institutions should remain unchanged the effects could be far from even from both geographic and sector perspectives. We anticipate that pressure will be more pronounced for NBFIs and entities with weak funding profiles or directly exposed to geopolitical risk. We note geopolitical risks are elevated, with some sovereign and bank rating actions recently occurring in the Middle East.

2023 was somewhat of a watershed. Contagion concerns for banks hit levels not seen since the 2007-2008 global financial crisis (GFC) following U.S. regional bank failures and the Swiss government-engineered acquisition of Credit Suisse by UBS in March 2023. Nine months on, the potential for contagion concerns to affect banks' funding and liquidity profiles has decreased considerably.

The events of March 2023, however, are a reminder of the importance of banks' funding and liquidity management. Funding and liquidity will be no less important to our rating considerations during 2024, and on a permanent basis thereafter.

Because of their typically "lend long/borrow short" asset and liability management profiles,

banks can be highly sensitive to confidence levels. The underlying causes of the U.S. regional bank sector difficulties and Credit Suisse were primarily idiosyncratic, rather than endemic. This primarily explains why the malaise affecting these banks did not spread more broadly.

The health of the global banking sector also helped prevent contagion risks taking hold.

Prudential standards across the sector have strengthened over the past 15 years based on lessons learned since the GFC. This enables the global banking community to better contend with major shocks. Some regulatory reforms remain a work in progress, and the occasional shock will undoubtedly continue to test the industry and result in new reforms. Potential changes to U.S. banking regulations affecting small banks are a case in point.

We fully anticipate that governments and public authorities will continue to play a vital role. In response to the events of March 2023 authorities took swift and decisive action, especially liquidity support, thereby averting a potentially much larger predicament. This reinforces our view that occasional intervention by authorities is not only likely, but necessary, depending upon the gravity and urgency of a situation.

Certain domestic stresses persist, however. Some of these could yet prove to be more problematic. Deposit levels at U.S. banks continue to be under pressure. U.S. money market funds thus far are key beneficiaries, compared with U.S. banks, in the higher-for-longer interest rates environment and in the wake of stresses affecting the U.S. regional banks (see chart 2). This factor, along with the deteriorating CRE market, equates to an equally challenging outlook for U.S. banks in 2024, compared with 2023.

The U.S. is far from the only banking system under pressure because of CRE. The unwind of the commercial property development sector in China will continue; and we anticipate higher credit losses across the banking sector. Furthermore, some European banking jurisdictions face increasing strains.

Chart 2

U.S. deposit levels challenged in higher-for-longer rates environment Higher-for-longer rates strain U.S. deposit levels (bil. US\$)

Total net assets - all money market funds
Sources: Federal Reserve. ICI.

Banking Sector Stability Hinges On Four Key Risks

While our outlook for the global banking sector is broadly stable in 2024, four key risks could change our view (see chart 3). At present, 79% of bank ratings globally are on stable outlook. Furthermore, across the 83 jurisdictions where we rate banks, we see economic risk trends as they affect banking sector creditworthiness as stable in 73 jurisdictions (see "Banking Industry Country Risk Assessment Update: October 2023," published on RatingsDirect, Oct. 31, 2023).

Chart 3

Four key risks could hit bank ratings

Deviation from our economic base case

Emergence of material downside--including a full-blown recession with a sharp rise in
unemployment and increasing geopolitical risks.

Source: S&P Global Ratings.

Greater property sector deterioration

Acceleration of weakness in CRE markets, ultimately hurting banks’ asset quality more than anticipated.

High corporate and governmentsector leverage

This could exacerbate corporate insolvencies and trigger lower government support for the real economy.

Digitalization, climate change, and cyber to challenge banks’ business models and risk management

Nontraditional risks add to the usual credit, market, funding, and operational risks.

High-For-Longer Interest Rates Will Test Banks

Higher interest rates have benefited banks' net interest margins thus far. The effect on bank profitability over the next 12-24 months will be mixed, however. The negative effect on bank borrowers from weaker economic growth and high interest rates will progressively contribute to higher credit losses.

For 2024 we forecast US\$824 billion in credit losses for global banks, a 6.3% increase compared with 2023. For 2025 we forecast credit losses of US\$859 billion, a further increase of 4.2 % compared with 2024 (see chart 4).

We believe that most banks can contend with higher credit losses in 2024 and 2025 at current rating levels, albeit that ratings headroom will decrease for some. By contrast, a recessionary downside scenario materially outside our base case including our most recent economic forecasts would undoubtedly cause negative ratings momentum to occur in (for our latest global economic forecasts refer to "Global Economic Outlook Q4 2023: Nearing The Rate Plateau," Sept. 27, 2023).

We estimate that the top-200 rated banks represent about two-thirds of global bank lending, and our base-case forecasts show median credit losses of about 17% of pre-provision earnings 2023 and in 2024. This indicates that credit losses would need to be more than 5x higher than we forecast before such losses would deplete bank capital rather than earnings.

Chart 4

Global banking sector credit losses will increase Domestic credit losses by region, 2019 – 2025 (bil. US\$)

Data shown on a constant currency basis, based on 2022 year-end exchange rates. Data for China relates to commercial banks. a--Actual. f--Forecast. Source: S&P Global Ratings.

Potential secondary effects in the higher rates environment are also on our radar. As interest rate and foreign exchange derivatives reset and reprice, our base case is that banks will satisfactorily manage derivative risks. Furthermore, while the call feature of many hybrid capital instruments is optional for the issuer, investors are accustomed to hybrids being called. Higher interest rates are a reminder that the call feature gives issuers flexibility to manage the timing and cost of refinancing. We note that to date these risks have been well managed across the sector.

Property Sector Risks Intensify

Property risk levels are high and trends worsening in numerous banking jurisdictions. For the U.S. banks, CRE is a key risk factor heading into 2024. A sensitivity analysis by S&P Global Ratings in June 2023 concluded that a 10% CRE loss rate should be manageable for rated banks without heavy CRE exposure, noting that a significant rise in CRE losses could lead to heightened confidence sensitivity and deposit outflows. For rated U.S. banks with more than 30% CRE exposure, a 10% loss rate would equate to 29% of capital, versus 12% for all banks. This represents a much bigger hit and could lead to downgrades for some banks. There is a higher proportion of negative outlooks on U.S. banks compared with our regions.

Chart 5

Sensitivity chart: All FDIC bank CRE losses to tier 1 capital

FDIC--Federal Deposit Insurance Corporation. Excludes owner-occupied. Data as of March 31, 2023. Sources: FDIC data and S&P Global Ratings.

Similarly, a worsening property sector is a major contingency for the Chinese banking sector. The unwind across the property developer sector in China is a work in progress, with national property sales remaining under pressure (see chart 6). A recent S&P Global Ratings downside scenario for China (to which we assigned a 1-in-5 probability) assumed a further 20%-25% decline in 2024 property sales from 2022--causing China's real GDP growth to drop to 2.9% in 2024 from our base case of 4.4%. Under these conditions, we expect the nonperforming asset (NPA) ratio of Chinese commercial banks to increase to 6.1% in 2023, 7.0% 2024, and 6.0% in 2025. This compares with our July 2023 estimates of 5.4%, 5.0%, and 5.0%, respectively. This will push up annual credit losses to Chinese renminbi (RMB) 2.9 trillion over 2023-2025, 18% above our previous estimate of RMB2.4 trillion.

Higher interest rates will test indebted households Household debt as a percentage of GDP, selected jurisdictions (%)

Chart 6

National property sales continue to fall Total sales (tril. RMB)

RMB--Chinese renminbi. e--Estimate. Sources: National Bureau of Statistics of China, S&P Global Ratings.

Residential mortgage lending performance is mixed in the current higher rates environment. There is significant variation between and within banking jurisdictions noting that many countries are holding up well so far. Increasingly, higher rates are stretching some cohorts of residential borrowers. Most noteworthy among these are recent, fully extended, first-time borrowers.

High household sector leverage for some jurisdictions (see chart 7) adds an element of vulnerability. Low unemployment levels, and strong regulatory standards help alleviate concerns.

Chart 7

f--Forecast. Source: S&P Global Ratings.

High Leverage Is A Key Risk

High-for-longer-than-anticipated interest rates against an already-high leverage backdrop is a key risk for banks. Leverage across the nonfinancial corporate and government sectors is at near record highs (see chart 8; and "Global Debt Leverage: Is a Great Reset Coming?," March 20, 2023). Reinforcing our risk assessment is that leverage is much higher than prior to the GFC. Leverage spiked during the COVID-19 pandemic (as governments and corporates borrowed heavily to support cash flows).

Our assessment primarily considers that high corporate leverage could cause more corporate insolvencies, while high government leverage could diminish the capacity (if not willingness) of some sovereigns to provide ongoing support to real economies and thereby bank borrowers. It could also limit the capacity of some sovereigns to provide extraordinary support to certain banking jurisdictions (if extraordinary support was required).

Chart 8

Global leverage is higher than the pre-GFC and pre-COVID-19 level Debt-to-GDP leverage of global sectors (%)

Source: Institute of International Finance.

Structural Risks Are In The Mix

Cyber risk is a systemic threat for banks, given the financial sector's interconnectedness, and its heavy reliance on technology. It likewise has the potential to hit individual institutions (see "Cyber Risk Insights: European Banks' IT Complexity Amplifies Risk," March 23, 2023, and "Australian Mutual Lenders: Path Of Least Resistance May Lead To Higher Cyber Risk," Aug. 29, 2023). Guidewire data shows that banks face relentless cyberattacks but that most banks have strong defenses to counter such threats. Evolving regulatory frameworks lead us to anticipate that banks will continue to incur high ongoing costs to counter cyber risks.

New financial technologies have not to date been a meaningful ratings differentiator across the global banking industry. The potential for step changes in financial technologies means this could yet happen. We believe that digitalization of goods and services, distributed ledger technologies powering decentralized finance, virtual banks, and most recently artificial intelligence have the potential to transform banks' business models.

The environmental, social, and governance concerns of investors, government policymakers, and other stakeholders will continue to shape banks' policies and behavior. While climate change alone will have a limited direct impact on banks over the next several years, banks are integral in financing the climate transition across many industries. Banks' regulatory stresstesting, prudential frameworks, and disclosure standards increasingly factor in climate-related risks (see "Bank Regulation And Disclosure To Foster Climate-Related Risk Analysis," Oct. 4, 2022).

Bank Buffers Are Better And Stronger

Our base case is that strong bank balance sheets and improved risk management will help buffer banks against economic obstacles. This in turn will contribute to ratings stability at current levels. Most banks are much better capitalized and have greater asset quality since the GFC. The risk management of banks has also improved following global regulatory reforms led by the Basel Committee on Banking Supervision.

Capitalization is stronger. For the largest global banks (Bank for International Settlements group one), Tier-1 capital ratios have doubled to about 16% over the past 10 years (see chart 8). Stronger capitalization improves market and investor confidence in banks' ability to contend with negative events and helps banks navigate tough operating conditions.

Chart 9

Stronger capital since the GFC adds to banks' buffers Tier 1 ratios by region, group 1 banks (%)

The graph shows the fully phased-in initial Basel III framework for the data points up to and including the end of 2018 and the actual framework in place at the reporting date for all data points thereafter. Source: Basel Committee on Banking Supervision.

Asset quality is sound across developed banking markets. NPAs as a percentage of systemwide loans currently average only about 1% in certain of the largest developed banking systems (see chart 9). We consider banks in these and many other jurisdictions to have room to absorb a reasonable weakening in asset quality metrics, with no immediate negative rating impact.

Chart 10

NPA--Nonperforming assets. e--Estimate. f--Forecast. Source: S&P Global Ratings.

How Much Stronger?

Current rating levels reflect strong balance sheets and improved regulation and risk management; however, we anticipate that further tests of resilience will occur.

• Although banks' capitalization has increased--and the banking industry is heavily regulated and supervised--banks remain more highly levered than corporates.

• Global system-wide leverage is high. High leverage provides a more fractious backdrop and operating environment for the confidence-sensitive banking industry. The world is more indebted--and hence riskier.

• Key economic, geopolitical, and other risk factors for banks will intensify in a downside scenario, compared with our current base case scenario. This would hurt banks' asset quality and other rating factors, and more generally erode banking sector creditworthiness.

• Emerging risks and opportunities affecting banks, such as digitalization and new financial technologies, could transform the industry.

Maintaining the momentum of the past 10-15 years of improvement will be tough. Banks face an increasing range and intensity of new and emerging risk factors. Now that banks' balance sheets are stronger, we anticipate that the regulatory focus will pivot even more in the direction of prominent emerging and varied risk types including cyber risk, climate risk, and velocity of funds transmission.

Credit Divergence Will Continue

Economic, geopolitical and other factors cause us to anticipate further credit divergence between stronger and weaker financial institutions. Tests may be trickier for NBFIs than banks. NBFIs typically are much less diversified, can be more reliant on market funding, and often do not benefit from access to central bank liquidity. The recent year or so has already been tough for some NBFI segments.

We continue to monitor the evolution of the private credit market. Principally, we are cautious about the impact on financial system risks from NBFIs taking a progressively larger share of lending from banks. As bank regulations have tightened over the past decade, unregulated or less regulated NBFIs have gained market share. These institutions account for about half of global financial assets, according to the Basel-based Financial Stability Board (FSB). This compares with about 42% in 2008. Regulators are monitoring risks from nonbank entities, and may expand their reform and coverage.

Emerging market banks face inevitable tests. Downside risks that could hit emerging market banks are significant and include heightened geopolitical risks from the Hamas-Israel war, and doubts about a resolution of the Russia-Ukraine war (see "Emerging Markets Monthly Highlights: Turbulence Abroad Will Fuel Uncertainty," Oct. 20, 2023). We anticipate increased credit differentiation between stronger, systemically important financial institutions versus nonsystemically important financial institutions in some emerging market jurisdictions. These include China and India.

Banking Industry Country Risk Assessments (BICRA)

The strengths and weaknesses of an economy and its banking industry are critical factors that underpin the creditworthiness of a country's financial institutions. We distill this analysis into a Banking Industry Country Risk Assessment (BICRA). The BICRA is designed to evaluate and compare global banking systems. BICRAs are grouped on a scale from '1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10'). A BICRA analysis for a country covers all rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. The analysis considers the relationship of the banking industry to the financial system, and furthermore to its sovereign. The BICRA methodology has two main analytical components: economic risk and industry risk.

Notes On The Country Outlooks

• Every country outlook one-pager contains a link to the BICRA report or the general media release of the latest BICRA action at the top right corner.

• The data in the right columns of the one-pagers are rounded to one decimal place.

• NPA ratio: The ratio reflects nonperforming assets as a percentage of system-wide loans. NPAs include the sum of problematic exposures (including loans and foreclosed assets) due by private and public borrowers to a country's financial institutions. The definition of problematic exposures varies by country. The general standard is that exposures past due for more than 90 days are classified as nonperforming. In some jurisdictions this also includes exposures that are up to date in their payment obligations but that run the risk of becoming delinquent. For some countries in Europe, we use nonperforming exposure, based on the definition of the European Banking Authority. For several countries, nonperforming assets are not available. In such cases, we therefore use nonperforming loans.

Latin America

Europe

Emerging EMEA

Asia-Pacific

Note: 83 countries are included in the report. Countries are listed in alphabetical order by region.

North America

Bermuda | BICRA group: 5

High Rates Will Lead To Increasing Loan Losses

Key takeaways

• Bermuda's economy is slowing somewhat, but the international business sector and rebounding tourism continue to drive growth.

• We expect losses to rise modestly in banks' loan portfolios due to high rates and as affordability becomes a bigger issue.

• We expect banks will keep operating with very strong capitalization and sound liquidity.

Key credit drivers

Asset quality will deteriorate. We expect credit losses to increase modestly as borrowers struggle with higher rates.

Real estate prices could stabilize. Bermuda continues to experience a correction in its real estate sector; however, we believe home prices could stabilize given the shortage of homes in the country.

Key assumptions

Economic activity will slow. We expect GDP growth to be around 2.0% in 2023 and to average 1.0% in 2024 and 2025, after strong growth of 3.3% (estimated) and 5.4% in 2022 and 2021, respectively. Local employment dynamics will weigh on banks' asset quality and profitability.

Liquidity and capitalization ratios will remain solid. Bermudian banks will keep operating with ample liquidity (average loan-to-deposit ratio of 38% at year-end 2022) and sound capitalization. The sector's aggregate common equity Tier 1 ratio was 22.4% at year-end 2022.

Loan growth will be flat or down. Loans have, in general, been declining in Bermuda over the past few years, causing some banks to seek growth opportunities abroad. We expect Bermuda-based loan growth to continue to decline and loan growth outside of the country to be limited.

What to look for over the next year

Bermuda should maintain its appeal as an international financial center. The international business sector continues to support the economy. We expect any tax changes Bermuda implements will ensure that its economy--and this sector in particular--remain competitive.

Stronger tourism will also be key to boosting employment. Tourism is returning, which could boost employment, because we view tourism as a significant generator of jobs.

Primary Credit Analyst

Lidia Parfeniuk
Canada
lidia.parfeniuk@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

0.0% 2 024 forecast

1.0% 2023 estimate

3.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.8% 2024 forecast

4.9% 2023 estimate

5.1% 2022 actual

RoAA

Sector-average return on average assets.

2024 forecast

2.0% 2023 estimate

2.2% 2022 actual

Figures as of fiscal year ending December.

Canada | BICRA group: 2

Rising Provisions Pressure Operating Performance

Key takeaways

Elevated interest rates continue to pressure Canadian banks' asset quality, which will lead to increased but manageable net charge-offs (NCOs) in 2024.

• Loan growth will continue to moderate as demand dampens due to high rates.

Banks' operating performance is under pressure as funding costs remain elevated and provisions rise.

Key credit drivers

Interest rates are likely nearing a peak. Affordability pressures are mounting as households renew mortgages and debt servicing costs rise. We expect elevated interest rates to continue to pressure banks' credit quality and loan growth in 2024, although we think rates are nearing a peak.

Banks will maintain adequate capital ratios. Conservative capital management leaves banks well positioned to withstand economic uncertainty. Effective Nov. 1, 2023, domestic systemically important banks (DSIBs) must maintain a minimum common equity Tier 1 ratio of 11.5%, up 50 basis points from the current level. We believe DSIBs will exceed this minimum, and their S&P Global Ratings risk-adjusted capital ratios will remain in our adequate range of 7%-10%.

Key assumptions

Credit quality will deteriorate from very strong levels. We expect this weakening as elevated interest rates affect clients' ability to service their debt. Savings amassed during the pandemic have shrunk significantly, and we expect unemployment to rise modestly in 2024. This will cause NCOs to rise from very low levels, though we expect them to remain manageable. Banks are also holding more capital amid economic uncertainty.

Loan growth will slow. Elevated rates will decrease demand for loans. The mortgage market in Canada, in particular, has slowed, with most banks expecting low single-digit mortgage growth in 2024, with overall loan growth in the mid-single digits.

What to look for over the next year

Funding price pressures continue. We expect pressure on net interest margins to continue as migration to interest-bearing deposits has raised deposit pricing. At the same time, once interest rates top off, price pressures should ease. Banks maintain diverse funding sources, which we expect will help keep liquidity metrics stable.

Operating performance is under pressure. A deteriorating economic outlook is leading to higher provisions for loan losses. Expense management will also be important for most banks as lingering inflation could cause expense growth to outpace revenue growth in 2024.

Primary Credit Analyst

Lidia Parfeniuk
Canada
lidia.parfeniuk@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

5.0% 2 024 forecast

6.0% 2023 estimate

14.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.6% 2 024 forecast

0.5% 2023 estimate

0.4% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2 024 forecast

0.7% 2023 estimate

1.0% 2022 actual

Figures as of fiscal year ending December.

U.S. | BICRA group: 3

Banks Operating Cautiously Amid Higher-For-Longer Interest Rates

Key takeaways

• The banking industry has found greater stability following bank failures in March and April 2023, and we expect banks in aggregate to remain profitable and build capital in 2024.

• Still, potential further declines in deposits, rising funding costs, unrealized losses, CRE exposures, and economic uncertainty are key risks.

Regulators have proposed important changes to capital and resolution requirements and will likely call for further updates to supervision and regulation in the wake of the failures.

Key credit drivers

Economic performance will be below potential. S&P Global economists expect a resilient U.S. economy to avoid recession but to endure a multi-quarter period of sub-potential growth. Under this view, monetary policy rates and financial conditions will be tighter for longer.

High interest rates will weigh on earnings. High rates initially lifted earnings but are now hurting NII and have led to unrealized losses on assets. Rates may also have a rising impact on asset quality.

Funding and liquidity will weaken. If the Federal Reserve continues to quantitatively tighten, deposits and liquidity in the banking system could gradually decline further in 2024.

Key assumptions

Rated banks will avoid unmanageable deposit outflows. While deposits have declined and funding costs have risen in 2023, we do not believe the banks we rate are seeing sharp deposit outflows. They also will likely conserve liquidity with muted loan growth.

Profitability will remain reasonably strong, and banks will build capital. While NII may decline in 2024, we expect banks to generate a return on common equity of 9%-11% in 2024 and to build capital through earnings retention, particularly as they plan for more stringent capital regulation.

Asset quality pressure will increase but remain manageable. Most asset quality measures have been normalizing. While we expect further weakening in 2024, we believe banks' pre-provision earnings generally place them well to absorb the associated credit losses.

What to look for over the next year

Updates to supervision and regulations. Regulators have proposed strengthening capital and resolution planning requirements for banks with more than \$100 billion in assets. They may finalize those proposals and make further proposals pertaining to liquidity regulations and other topics.

The Fed's ability to reduce inflation and long-term rates. The Fed has made some progress in slowing inflation. However, it is unclear if its rate increases to date will be enough to reduce inflation to its target. Long-term rates, such as the 10-year Treasury rate, are also near multi-year highs.

CRE maturities. We expect areas of CRE lending to face challenges, especially in the office market. While most rated banks are positioned to handle the risk, loans maturing in 2024 and 2025 may add to asset quality and confidence sensitivity risks.

Primary Credit Analyst

Brendan Browne

New York brendan.browne@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

1.5% 2023 estimate

8.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.3% 2 024 forecast

1.2% 2023 estimate

1.1% 2022 actual

RoAA

Sector-average return on average assets.

1.1% 2024 forecast

1.2% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Latin America

Argentina | BICRA group: 9

Significant Challenges Stemming From Sovereign Conditions

Key takeaways

• Argentina's banking industry is hampered by significant challenges at the sovereign level, limiting our ratings on financial entities.

• To withstand volatility and adverse operating conditions, the system maintains high liquidity, but mostly through central bank securities and government bonds. Still, the system has good regulatory capitalization metrics considering its asset mix.

Profitability will remain heavily reliant on central bank holdings and government securities amid sluggish loan originations and very high inflation.

Asset quality metrics remain manageable, given lenders' focus on less risky segments and satisfactory provisioning levels.

Key credit drivers

The sovereign's weak fundamentals continue to constrain the ratings on financial institutions. Macroeconomic and policy factors in Argentina have exacerbated distortions in the domestic financial system. Very high inflation and reference rates, subdued credit demand and investments, and cautious lending have crimped loan growth in real terms, with an increasing exposure to central bank instruments and government bonds.

Banks keep high liquidity and regulatory solvency to cope with volatility. Banks maintain high regulatory capital metrics amid low credit growth, greater weight of liquid assets, and moderate dividend distributions.

Key assumptions

Banks continued to generate profitability in real terms, despite very high interest rates. Results in the upcoming months will be highly influenced by inflation and interest rates. For 2023, we expect the industry's average return on assets to be about 3.0%, compared to 1.9% in 2022, with banks relying on securities to compensate for the country's triple-digit inflation.

Asset quality metrics will stay manageable. Although loan growth has been below inflation, we expect the system to keep credit losses manageable. As of July 2023, nonperforming loans accounted for 3.0% of total loans, with higher delinquency among public banks (4.9%) than private ones (1.8%). Although we expect metrics to weaken as purchasing power falls, metrics and losses should remain manageable, given banks' good levels of provisions.

What to look for over the next year

Economic and political developments could weigh on banks. Our BICRA for Argentina has a negative industry risk trend, incorporating the potential impact that adverse developments at the sovereign level could have on the financial system's funding and credit fundamentals. We're closely monitoring political and economic developments related to the current presidential elections, as well as sovereign debt dynamics and their influence on financial institutions.

Primary Credit Analyst

Ivana Recalde
Buenos Aires
ivana.recalde@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

130% 2 024 forecast

98% 2023 estimate

68% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.4% 2 024 forecast

3.3% 2023 estimate

3.1% 2022 actual

RoAA

Sector-average return on average assets.

2.0% 2024 forecast

3.0% 2023 estimate

1.9% 2022 actual

Figures as of fiscal year ending December.

Bolivia | BICRA group: 10

Unstable Economic Conditions And Government-Mandated Lending Heighten Credit Risks

Key takeaways

• Risks in the domestic financial system from the pandemic's effects remain but should start receding in the first half of 2024.

• Government-directed lending will continue to pressure the banking industry's profitability.

• The government will continue to struggle to manage fiscal and external vulnerabilities.

Key credit drivers

Unstable macroeconomic conditions weigh on asset quality. Increasing economic challenges during 2022 and the first half of 2023 pushed up risks in the Bolivian financial system by widening credit losses and pressuring profitability and capital. Moreover, although the banking system has lowered its exposure to dollar-denominated loans and deposits in recent years, we still think the deterioration in the country's external conditions could weaken the domestic financial industry.

Directed lending narrows profits. Mandated lending is likely to continue intensifying competition and depressing margins among domestic banks. This is because the law regulates ceilings on lending rates and requires banks to comply with minimum credit quotas aimed at low-income homebuyers and productive sectors such as agriculture, mining, manufacturing, and tourism.

Key assumptions

GDP growth to slow. We forecast Bolivia's economic growth to slow to about 2.0% in 2023 and 2.5% in 2024. In particular, private investment and foreign direct investment will likely remain low.

Manageable though rising credit losses. We think banks' credit losses will continue to grow after the government lifted pandemic-related debt moratorium policies, with losses peaking in 2023 and then starting to fall in 2024. However, the impact should be manageable thanks to banks' conservative provisioning policies and high share of collateralized loans. Still, stiff lending competition and underwriting standards could result in further credit losses in upcoming years.

What to look for over the next year

Role of the administration. The government still has to confront Bolivia’s weak public institutions, high corruption levels, and high political polarization--an obstacle to fiscal consolidation. It also has to address external vulnerabilities amid soft exports of natural gas and weaker public confidence in the sustainability of the exchange rate regime.

Companies' high debt and banks' lending concentration. Regulatory lending quotas and interest rate caps have encouraged rapid credit growth among the productive sectors, which has resulted in high debt levels. In addition, Bolivian laws encourage increasing lending volumes and concentration in cyclical sectors with large loans and longer durations for banks to meet targets, which could ratchet up credit risks in the system.

Primary Credit Analyst

Joaquin Jolis
Buenos Aires
joaquin.jolis@spglobal.com

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Loan growth

Sector-average growth in loans.

7.0% 2024 forecast

2.5% 2023 estimate

7.5% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.1% 2 024 forecast

3.3% 2023 estimate

2.2% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.6% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

Brazil | BICRA group: 6

Resilient Operating Performance Thanks To High Provisioning Coverage

Key takeaways

Credit growth will remain muted in 2024 due to banks' low appetite for retail unsecured credit, low demand from corporates, and soft economic performance.

We expect asset quality metrics to start stabilizing by the end of 2023 and to fall in 2024 as loans issued under stricter underwriting practices become more relevant.

• Operating performance will likely remain solid thanks to banks' good provisioning coverage, business diversification, and high margins.

Key credit drivers

We expect nonperforming loans to start stabilizing by the end of 2023 and to fall in 2024. This should occur as new vintages with stronger performance come to represent a higher share of total loans, thanks to banks' stricter underwriting practices. Credit losses should remain manageable thanks to good provisioning coverage.

Profitability has been resilient and continues to benefit from banks' business diversification, including via insurance and asset management. Although provisions have picked up, pressuring operating performance this year and next year, profitability will remain sound compared with international peers thanks to banks' high margins.

Key assumptions

Brazil's economy should expand 2.9% this year amid strong agricultural production and the continued impact of fiscal stimulus measures on household spending. We expect growth to slow to 1.2% in 2024 as those factors become less supportive.

Lending growth should remain 6%-10% in 2023 and 2024. Credit demand from the corporate sector should remain modest alongside banks' lower risk appetite in the retail unsecured segment. Soft economic performance in 2024 will contribute to maintaining slower credit growth.

What to look for over the next year

Risks remain that an inadequate policy framework and poor implementation results could limit economic activity and investment decisions, further squeezing banks' asset quality and lending growth. A deterioration in policy signaling could also affect foreign direct investment inflows and, as a result, weaken Brazil's strong net external position.

Historically, government-owned banks' strategic direction and risk appetite have changed according to the political parties in power, and we think the current government could maintain this approach. However, the implementation of the State-Owned Company Act in 2017 significantly improved these banks' governance, promoting greater transparency in decision-making processes and limiting political appointments to banks' executive positions.

Primary Credit Analyst

Cynthia Cohen Freue
Buenos Aires
cynthia.cohenfreue@spglobal.com

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Loan growth

Sector-average growth in loans.

8.0% 2024 forecast

8.0% 2023 estimate

14.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.6% 2 024 forecast

3.6% 2023 estimate

3.0% 2022 actual

RoAA

Sector-average return on average assets.

2024 forecast

1.4% 2023 estimate

1.5% 2022 actual

Figures as of fiscal year ending December.

Chile | BICRA group: 3

Weak Political Consensus Pressures Economic Prospects

Key takeaways

On Oct. 19, 2023, S&P Global Ratings revised its outlook on Chile to negative from stable on weaker political consensus on key parameters of the country's political and economic agenda, which over time will weigh on Chile's capacity to grow and potentially weaken its credit quality.

The trend for economic risk in Chile's Banking Industry Country Risk Assessment is negative, reflecting that following the conclusion of the constitutional redrafting process, political impasses could persist, hampering meaningful legislation to strengthen economic prospects and investment.

• So far banks have performed strongly, but asset quality metrics and profitability are weakening due to persistently high interest rates and weak economic performance.

Key credit drivers

We expect asset quality indicators will keep deteriorating but remain manageable. Nonperforming loans were at 1.9% as of June 2023. We expect metrics to remain under pressure as economic conditions remain weak and interest rates, though decreasing, remain high.

We expect banks' profitability to come under pressure in 2023 and 2024. It has been sound in the past two years thanks to low provisioning needs and improved margins that benefit from higher inflation, given that banks tend to have long positions in inflation-adjusted assets. However, we think weaker asset quality will lead banks to raise provisions, which will weigh on profitability.

Key assumptions

Credit growth will likely remain modest amid sluggish economic growth and uncertainty about several government reforms still being discussed. Chilean banks' risk appetite remains restricted as they protect their balance sheets, while low investment is leading to lower demand from the corporate sector.

Implementation of the new banking law to align to the Basel III framework is still in progress. The implementation of Basel III began in 2020 and will be completed in 2025. We believe banks are well prepared to keep up with the higher capital requirements, including the progressive implementation of deductions and buffers.

What to look for over the next year

Political impasses may persist, preventing agreement on meaningful legislation to strengthen economic prospects and investment. Weaker economic prospects could further pressure asset quality metrics and banks' operating performance.

represent about 5.4% and 3.2% of their total liabilities, respectively. The Financing Facility Conditional on Increased Lending (FCIC) is a facility offered by the central bank as part of its actions to ensure credit and payment chain continuity during the pandemic. Since January 2023, banks have started to replace the guarantees of these facilities with eligible liquid assets gradually over 18 months.

Primary Credit Analyst

Cynthia Cohen Freue
Buenos Aires
cynthia.cohenfreue@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

7.0% 2024 forecast

4.0% 2023 estimate

10.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.2% 2024 forecast

2.1% 2023 estimate

1.7% 2022 actual

RoAA

Sector-average return on average assets.

1.1% 2024 forecast

1.1% 2023 estimate

1.5% 2022 actual

Figures as of fiscal year ending December.

Colombia | BICRA group: 6

Economic Headwinds Will Pressure Asset Quality And Undermine Profits

Key takeaways

• Colombia's economic growth will remain below trend in 2024, due to persistently high interest rates. This will limit credit demand, particularly from households.

• Higher household debt and deteriorating purchasing power, still weak labor market dynamics, and elevated rates will erode asset quality beyond cyclically low levels.

• We expect macro policy continuity as the government implements social reforms.

Key credit drivers

After rapid growth of household debt, banks' asset quality is weakening. High interest rates and elevated inflation is weakening households' purchasing power. The latter--along with subdued credit growth in 2023, although slightly recovering in 2024--will pressure banks' asset quality metrics.

Increasing provisions and high funding costs will pressure profitability. Weakening asset quality will require banks to increase provisions. However, we believe banks maintain credit loss reserves in excess of nonperforming assets, which could cushion the impact on profitability. Moreover, because banks need to comply with the 100% regulatory net stable funding ratio, the strong competition for retail and time deposits will create additional pressure on interest expenses.

Large banks' expansion to Central America. This expansion provides business diversification but pressures capitalization. Moreover, the appreciation of the Colombian peso is affecting profits, given that revenues from these countries are denominated in U.S. dollars and become smaller when converted into Colombian pesos.

Key assumptions

Economic conditions will weaken. After the strong economic recovery in 2021-2022, we expect Colombia's economy will expand about 1.4% in 2023 and 1.9% in 2024 due to persistently high interest rates.

Credit growth will remain subdued in 2024. Uncertainty over the government’s economic policies could weaken business confidence and limit credit demand from companies and individuals. We expect total loans to grow about 4.5% in nominal terms in 2023 and about 7.0% in 2024, while inflation will remain above the central bank's target in 2024.

What to look for over the next year

Evolution of banks' asset quality and profitability. Cooling economic activity, more stringent lending policies, and still high rates will increase banks' credit losses. We will monitor these variables to assess potential impacts on asset quality and profitability.

Primary Credit Analyst

Alfredo Calvo
Mexico City
alfredo.calvo@spglobal.com

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Loan growth

Sector-average growth in loans.

7.0% 2024 forecast

4.5% 2023 estimate

16.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.3% 2024 forecast

3.5% 2023 estimate

2.5% 2022 actual

RoAA

Sector-average return on average assets.

1.2% 2 024 forecast

1.0% 2023 estimate

1.8% 2022 actual

Figures as of fiscal year ending December.

Costa Rica | BICRA group: 8

Struggling Profitability Counterbalanced By Asset Quality Improving Toward Historical Levels

Key takeaways

In our view, a lack of profitability systemwide continues to be one of the main weaknesses of Costa Rica's banking industry.

• Asset quality is improving as unemployment decreases and inflation gradually recedes.

The recovery of Costa Rica's banking segment will continue speeding up as macroeconomic conditions improve following the country's improving external and fiscal profile.

Key credit drivers

Distorted competitive dynamics continue to drag down profitability. The two largest banks are state-owned and hold about 35% market share of loans, which causes market distortions and depresses profitability. For the past five years, return on average equity was 3.9% and return on average assets was 0.6%, below other banking systems in the region.

nonperforming assets (NPAs) have gradually decreased over the past two years, which will keep economic imbalances in check. We expect this trend to continue as unemployment falls and inflation gradually recedes. Therefore, we forecast that the system's NPA ratio will average 2.4% and credit losses will be about 1% for the next two years.

Key assumptions

Persistently high interest rates and the decreasing cost of risk will support the system's

profitability. Even though interest rates are slowly decreasing in Costa Rica, interest income remains high because loans that were originated with high active rates continue to amortize. Additionally, collection levels remain stable, which limits the cost of risk. For 2024, we forecast a return on average equity of 3.5% and a return on average assets of 0.6%.

We expect Costa Rica's financial improvements to gradually result in credit growth. The country's external debt--net of liquid assets--has declined amid growing exports and accumulation of liquidity. In addition, growth is led by export-oriented goods and service sectors, including export zones with the potential to attract more nearshoring and friendshoring. In our view, this will translate to positive credit growth of 4%-5% in nominal terms for the next two years.

What to look for over the next year

Costa Rica's fiscal plan execution and access to external funding will support growth in the

banking system. In our view, the modification of the fiscal spending rule and implementation of the public employment regime will facilitate the government's planned tapping of global markets under its multiyear borrowing authority. This should improve the banking system's credit growth momentum in the next two years.

Primary Credit Analyst

Juan Jaime Romero
Mexico City
juan.jaime.romero@spglobal.com

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Loan growth

Sector-average growth in loans.

5.0% 2024 forecast

2.0% 2023 estimate

3.3% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.4% 2 024 forecast

2.6% 2023 estimate

2.8% 2022 actual

RoAA

Sector-average return on average assets.

0.6% 2 024 forecast

0.6% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

El Salvador | BICRA group: 9

Banks' Exposure To Sovereign Debt Limits The Industry's Liquidity

Key takeaways

Salvadoran banks have increased their exposure to government risk, and we don't expect them to reduce it in the next 12 months. This exposure limits their flexibility to fund productive economic sectors.

We think the lack of checks and balances in the country is a risk to the banking industry's competitive dynamics.

• Although the sovereign faces economic headwinds to broaden its funding profile, we don't ex rp decrease in companies' and households' payment capacity that would erode domestic banks' asset quality in the next 12 months.

Key credit drivers

Systemwide liquidity constraints due to banks' exposure to sovereign debt. We estimate that banks' exposure to short-term government bonds is about \$1.8 billion. Recently, the Salvadoran government accepted private banks' proposal to extend the tenor of part of the government’s shortterm debt and swap it to medium- and long-term debt. Nonetheless, this won't reduce the banking industry's exposure to government debt in the next 12 months.

El Salvador's weak external position remain a risk for the banking system. If the country's economy worsens and its external position and rule of law keep weakening, it could continue straining the government's capacity to access its funding sources. We think this could pose risks for El Salvador to service its medium- and long-term debt with domestic banks.

Key assumptions

We expect banking industry loan growth to remain subdued. Although we think improving public security could increase internal mobility and tourism inflows, in our view, economic growth and consequently banking credit growth will remain modest. This is given the still low foreign investment, limited productivity, and high emigration of its labor force.

High credit risk in the economy. We expect banks to maintain manageable delinquency levels and credit losses in the next 12 months. However, we anticipate that high inflation, modest foreign investment, and the country's inherent economic and social challenges will remain notable risks for the banking system.

What to look for over the next year

Weak check and balances will keep pressuring the industry's dynamics . Even though banks in El Salvador have avoided exposure to cryptocurrency on their balance sheets, the banking system's exposure to bitcoin could bring additional controls and higher regulatory transparency.

The government's ability to raise money. Even though the government has decreasing financing needs for the next 12 months, it still has pronounced macroeconomic vulnerabilities and limited financing options.

Primary Credit Analyst

Erick Rubio
Mexico City
erick.rubio@spglobal.com

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Loan growth

Sector-average growth in loans.

5.3% 2 024 forecast

3.7% 2023 estimate

10.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.3% 2024 forecast

2.0% 2023 estimate

2.3% 2022 actual

RoAA

Sector-average return on average assets.

2024 forecast

1.5% 2023 estimate

1.4% 2022 actual

Figures as of fiscal year ending December.

Guatemala | BICRA group: 7

Despite Economic Stability, Challenging Operating And Market Conditions Could Limit Credit Growth

Key takeaways

Cautious fiscal and monetary policies have stabilized Guatemala's economy and supported continued GDP growth. On the other hand, we think banks face operating challenges such as a potential slowdown in remittances and exports, a low-income economy, and a large informal economy that could limit their growth.

• We forecast that asset quality indicators will deteriorate slightly amid strong consumer loan growth among the largest banks. But we also think they'll remain manageable and consistent with our overall view of the credit risk in the economy.

Guatemala's banking system has a historically stable core customer deposit base and access to wholesale funding. However, underdeveloped domestic capital markets limit funding diversification.

Key credit drivers

Strong consumer lending growth, along with the complex global economic outlook, will strain Guatemalan banks' asset quality in 2024. Nonperforming loans should increase but remain manageable, representing less than 3% of total loans. This is because of strong consumer lending over the past 12 months and persistently high inflation that might weigh on companies' revenues and households' disposable income--and therefore, their payment capacity as well.

Guatemala's banking system continues to have a significant amount of foreign currency lending, which poses risks to that system. We estimate that foreign currency loans will stay close to 40% of total domestic loans in the next two to three years.

Key assumptions

We expect cautious macroeconomic management will prevail--notwithstanding the recent presidential election dispute and unfavorable global economic conditions. After Guatemala's solid economic recovery, we expect GDP growth of 3.4%, on average, for 2023-2025, which reflects macroeconomic stability despite the outcome of, and the recent legal dispute over, the election.

After strong credit growth last year, we expect the pace of growth to slow to 7%-8%, on average, for 2024-2025. The challenging global economic environment and persistently high inflation might contain Guatemala's credit expansion next year. We expect large banks to remain mostly focused on the corporate and commercial segments.

What to look for over the next year

U.S. economic performance and the aftermath of Guatemala's 2023 general election. Both will be crucial to Guatemala's economic growth and credit expansion in 2024-2025.

Infrastructure projects and public investment. The development of the infrastructure sector remains slow. Public investment and the growth of infrastructure programs will be key to boosting the country's economy and credit growth in the next few years.

Primary Credit Analyst

Jesus Sotomayor
Mexico City
jesus.sotomayor@spglobal.com

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Loan growth

Sector-average growth in loans.

7.0% 2024 forecast

9.0% 2023 estimate

16.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.3% 2 024 forecast

2.1% 2023 estimate

1.8% 2022 actual

RoAA

Sector-average return on average assets.

1.7% 2024 forecast

1.8% 2023 estimate

1.9% 2022 actual

Figures as of fiscal year ending December.

Honduras | BICRA group: 8

Obstacles To Retail Loan Growth Will Keep Constraining Banks' Margins

Key takeaways

• Falling real incomes and rising prices will continue hampering household consumption, limiting banks' ability to significantly increase their net interest margins.

• On the other hand, we expect the recovery of various corporate segments, particularly exports and manufacturing, to keep supporting Honduran banks' growth.

• The largest banks' stable and diversified retail deposit bases bolster liquidity.

Key credit drivers

business. We believe that weakening incomes amid rising prices will continue to act as a drag on household consumption, which, along with high competition in the commercial segment, will limit a consistent increase of banks' net interest margins. In addition, the banking system's relatively high administrative expenses weigh on profitability.

Honduras relies heavily on its main commercial partner, the U.S. Honduras' growth prospects, and consequently the banking system's credit growth, depend in part on GDP growth in the U.S.--the destination for close to 40% of Honduran exports and the main origin of remittances. A slowdown in the U.S. could inhibit the growth of banks' consumer loan portfolios in 2023-2024.

Key assumptions

The banking system will continue to expand at over 12%. We believe overall lending will grow 12%- 14% in the next two years due to the steady performance of diverse commercial sectors in the country. We expect growth mainly in the corporate segment, while the retail and consumer segments will continue to grow modestly in the next 12-24 months.

Asset quality metrics will remain manageable and in line with those of peers in the region. In our opinion, large banks will keep nonperforming assets relatively under control because they mostly lend to large corporations. On the other hand, the weak economy and low GDP per capita could cause banks with narrower diversification and exposure only to consumer loans to have sharper dips in asset quality.

What to look for over the next year

Still low per capita GDP, high poverty, and large informal sector. Honduras continues to have high poverty levels and its per capita income growth has suffered from many years of low investment and weak competition. We think these factors will keep constraining retail loan growth.

The energy sector and government spending. The government-owned electricity company, Empresa Nacional de Energía Eléctrica (ENEE; not rated), continues to pose a major fiscal weakness. We expect the government's commitment to make ENEE's finances more sustainable will lead it to offer transfers to compensate for ENEE's losses. Focusing on reducing ENEE’s losses leaves the government with little room to expand basic services, which require long-term expenditures.

Primary Credit Analyst

Erick Rubio
Mexico City
erick.rubio@spglobal.com

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Loan growth

Sector-average growth in loans.

12.0% 2024 forecast

14.2% 2023 estimate

22.3% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.5% 2 024 forecast

2.4% 2023 estimate

2.3% 2022 actual

RoAA

Sector-average return on average assets.

1.2% 2024 forecast

1.3% 2023 estimate

1.3% 2022 actual

Figures as of fiscal year ending December.

Jamaica | BICRA group: 8

Rebounding Credit Growth And Stable Asset Quality

Key takeaways

Jamaica continues to face high economic risks. However, the risks from the pandemic for the economy and public finances are receding, as reflected by the recent sovereign upgrade.

• We expect credit growth to average 11% in 2023-2024 as the economy grows.

• After peaking in 2021, asset quality has since improved, supporting profitability.

Key credit drivers

Lower risks in the domestic economy. Jamaica's economy has recovered well following a sharp contraction in 2020, and we expect it will continue to grow, albeit at a slower pace, in the next few years.

Banking industry benefiting from stable macroeconomic conditions. We expect banks to continue to have healthy performance, as they have over the past two years, with steady credit growth and manageable credit losses.

Initiatives for centralized oversight amid mergers and acquisitions. Caribbean conglomerates have been undertaking mergers and acquisitions, which could introduce spillover risks in times of stress because of increased cross-border business links in the region. In our view, it will be crucial for acquisitions to move in parallel with enhancements of systemic risk management.

Key assumptions

Economic growth returning to pre-pandemic levels. We expect real GDP growth of 2.1% in 2023, spurred by tourism and mining, and growth of 1.6% in 2024, which is in line with pre-pandemic levels.

Manageable asset quality. We expect stable asset quality in 2023-2024, supported by the good local economic conditions. Developments in the U.S., given Jamaica's growing loan exposure to overseas residents and Jamaicans' high reliance on remittances, will continue to influence asset quality.

What to look for over the next year

Stronger regulations. We expect regulatory bodies to continue to take steps for a more developed financial industry, which could attract foreign investors in the next few years. For example, an improved and centralized oversight framework would help mitigate the increasingly interconnected risks across the island and the Caribbean.

Unregulated players introducing market distortions. We think the increasing presence of unregulated credit unions, which generate stiff competition through lower lending interest rates, weighs on the system's stability. However, regulators have started an initiative to formally supervise these entities, which should help lessen market distortions if the initiative takes effect.

Primary Credit Analyst

Ivana Recalde

Buenos Aires ivana.recalde@spglobal.com

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Loan growth

Sector-average growth in loans.

12.0% 2024 forecast

10.0% 2023 estimate

12.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.4% 2 024 forecast

2.5% 2023 estimate

2.5% 2022 actual

RoAA

Sector-average return on average assets.

2.7% 2024 forecast

2.7% 2023 estimate

2.8% 2022 actual

Figures as of fiscal year ending December.

Mexico | BICRA group: 5

Economic Resilience Will Continue Promoting Credit Growth, Although At A Moderate Pace

Key takeaways

We expect Mexico's economic activity to weaken in 2024. Along with high interest rates, we think this will limit credit demand.

• Weakening economic conditions and persistently high rates will pressure bank asset quality and profitability, although they will remain healthy.

• Banks will keep operating with solid capitalization and sound liquidity.

Key credit drivers

Bank nonperforming assets (NPAs) to increase but remain manageable and fully covered by reserves. A slowing economy and high rates are pressuring households and companies’ debt payment capacity. However, banks' long-standing conservative lending practices will cushion the impact.

Higher provisions for credit losses will pressure profitability. However, sound margins, cost containment efforts, and conservative underwriting policies will allow Mexican bank profitability to remain healthy. We expect returns on assets to hover around 1.7%-1.8% while returns on equity will be about 17% in 2023-2024.

Key assumptions

Challenges despite better-than-expected economic growth in 2023. We expect Mexico's real GDP to decelerate in 2024 to 1.7%, and thereafter we see growth increasing to about 2.0% in 2025. In our view, the key to strengthening growth is more robust investment. The main obstacles for growth are rule of law, public insecurity, quality of education, and the scarcity of energy and water.

confidence. Still high inflation has eroded household purchasing power and corporate profits while high rates are discouraging credit demand. As long as the local debt market remains calm, banks can support the financing needs of large and midsize companies with adequate credit quality. On the other hand, loans to individuals will be concentrated in credit cards, payroll loans, and mortgages.

What to look for over the next year

Nearshoring could increase credit demand. We'll follow how key obstacles--including securityrelated concerns and inadequate supply of water and energy--will be addressed.

The 2024 national elections. We assume the current administration will remain cautious in executing economic policies. However, we don’t expect policy actions will substantially strengthen Mexico’s business environment.

Primary Credit Analyst

Alfredo Calvo
Mexico City
alfredo.calvo@spglobal.com

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Loan growth

Sector-average growth in loans.

8.0% 2024 forecast

8.0% 2023 estimate

12.5% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.4% 2 024 forecast

2.5% 2023 estimate

2.3% 2022 actual

RoAA

Sector-average return on average assets.

1.7% 2 024 forecast

1.8% 2023 estimate

2.0% 2022 actual

Figures as of fiscal year ending December.

Panama | BICRA group: 5

Still Weakening Asset Quality And Modest Credit Growth In 2024

Key takeaways

• We expect weaker asset quality metrics in 2023 and 2024, with a gradual recovery afterward, as loan forbearance measures related to the pandemic ended in 2022.

• Profitability is recovering gradually, but the potential increase of loan-loss provisions could hamper banks' bottom-line results for the next 12 months.

• Although Panama doesn't have a lender of last resort, the government has successfully used Banco Nacional de Panama as the vehicle to provide liquidity to the banking system.

Key credit drivers

Weakening asset quality in the next 12 months. Despite manageable asset quality as support programs were phased out at the end 2022, we still consider that latent risks could dent borrowers' payment capacity and banks' asset quality. The high number of loans reported as Stage 3 support our belief that nonperforming assets (NPAs) could still rise and pressure the banking system this year. We forecast that NPAs will peak at about 3.4% with credit losses close to 1.0%, which will decrease gradually as the economy recovers. However, we expect these metrics to return to prepandemic levels after 2024.

Lack of a lender of last resort. Panama doesn't have a central bank, a formal lender of last resort, or an effective deposit insurance system to support distressed financial institutions. However, the government has used the public-owned bank, Banco Nacional de Panama, as the vehicle to provide liquidity to the financial sector, corporations, and small and midsize enterprises.

Key assumptions

Macroeconomic policies and diversified economy bolster growth prospects. Panama's GDP growth outperformed expectations during the last two years amid solid external performance and robust domestic recovery as mobility restrictions were lifted. Economy remained robust in 2023, reflecting resilience in consumption and continued recovery in construction and tourism. We expect GDP growth to average 6.5% in 2023. We forecast Panama's economy to grow 5% in 2024, given sound macroeconomic policies, high private- and public-sector investments, and a diversified economic base. Therefore, we expect credit growth to average 4.5% for the next two years.

What to look for over the next year

Although profitability is recovering, higher loa- loss provisions could hamper the system's bottomline results. During 2024, we expect systemwide returns will represent about 1.4% of adjusted assets, slightly higher than in 2023, but still below the 1.5% average prior to the pandemic.

Efforts to strengthen the regulatory framework. The financial system regulation continues to improve, reducing the gap with international regulations, although implementation challenges remain. In addition, the EU added Panama to its blacklist of uncooperative jurisdictions in terms of tax transparency and financial information, although the decision hasn't yet damaged the financial system, in our view.

Primary Credit Analyst

Ricardo Grisi Rodriguez Mexico City ricardo.grisi@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

5.0% 2023 estimate

11.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.0% 2024 forecast

3.4% 2023 estimate

2.8% 2022 actual

RoAA

Sector-average return on average assets.

1.4% 2 024 forecast

1.3% 2023 estimate

1.3% 2022 actual

Figures as of fiscal year ending December.

Paraguay | BICRA group: 8

Profits On The Rise Because Of Widening Margins, Offsetting Potentially Higher Losses

Key takeaways

Benign weather should boost the country's agricultural output. We estimate Paraguay's GDP will grow 5% in 2023 before returning to its trend growth rate of about 3% in 2024.

• The banking system remains highly exposed to cyclical sectors and dollarization. Regulations have been improving, but they're still aligning to international standards.

Nonperforming assets (NPAs) have been slightly increasing as previously deferred loans mature, but profitability continues to recover as margins increase.

Key credit drivers

Asset quality metrics remain manageable but have benefited from deferral measures. The severe drought that hit Paraguay's agribusiness sector in late 2021 had limited effect on NPAs. However, nonperforming loans (NPLs) have somewhat worsened in 2023, and they could further deteriorate as the still sizeable stock of restructured loans amortizes. Still, we think that NPAs will stabilize in 2024.

Profits should keep improving in 2023 and 2024 as wider margins offset potentially higher losses. The banking system's net interest margins should keep improving, which would boost the return on average equity to above 15% for the first time since the beginning of the pandemic.

Dollarization remains high, and the banking system is still exposed to cyclical sectors. Foreign currency lending in Paraguay's banking system was 46% of total loans in December 2022, in line with the five-year average of 45%. Moreover, cyclical sectors like agriculture and cattle continued to account for over 30% of total loans.

Key assumptions

We expect Paraguay's GDP growth to slow to 3% in 2024, after a strong export rebound in 2023. We expect economic diversification to continue over the next three years and gradually reduce the volatility of economic performance, helped by a large pulp mill project (Paracel) that is likely to materialize in 2024-2025.

What to look for over the next year

Economic activity. We'll continue to monitor Paraguay's economy, especially after the shocks in recent years that have weakened agents' payment capacity. Even though the economy has grown more diverse over the last decade, growth is still vulnerable to weather-related risks and commodity prices, because the soy and hydroelectric industries contribute about 7% of GDP.

Following the pandemic, and the recent severe drought, unemployment and informality remain slightly above pre-pandemic levels. Inflation and interest rates will also be key factors to monitor.

Asset quality. The evolution of the significant stock of restructured loans, coupled with its cyclicality, could potentially increase credit losses in the coming years, which could hurt the financial system's profitability and capitalization and limit credit growth.

Primary Credit Analyst

Henrique Sznirer
São Paulo
henrique.sznirer@spglobal.com

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Loan growth

Sector-average growth in loans.

10.0% 2024 forecast

10.0% 2023 estimate

12.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.5% 2024 forecast

4.5% 2023 estimate

4.2% 2022 actual

RoAA

Sector-average return on average assets.

1.9% 2 024 forecast

1.8% 2023 estimate

1.6% 2022 actual

Figures as of fiscal year ending December.

Peru | BICRA group: 5

Banking System Influenced By Sovereign And Climate Events

Key takeaways

• The evolution of sovereign fundamentals--including economic growth over the short to medium term--and external events are relevant factors for the industry.

We expect asset quality metrics to remain pressured due to the maturity of refinanced loans granted due to social disturbances this year, the deterioration of conditions in the retail segment, and the effects of the El Nino climate pattern.

Although profitability has been hit by higher provisioning needs, we expect it to remain satisfactory given still high loan rates and margins and a decreasing share of governmentguaranteed loans.

Key credit drivers

Ratings on financial entities are influenced by that on the sovereign. The sovereign's deteriorating credit fundamentals led us to revise the outlook on it to negative last year.

We expect asset quality metrics to remain pressured, but losses should be manageable given good provisioning levels and healthy profitability. Asset quality metrics will continue to be affected by maturing reprogrammed loans that were granted during social disturbances, the impact of weaker economic growth, and still weak disposable income for consumers. Climate events, especially El Nino in 2023 and potentially first-quarter 2024, will also affect metrics.

Key assumptions

We expect lending to remain moderate in 2023 and 2024. This is due to the final amortization of government programs granted during the pandemic and economic agents’ continued cautious approach to new investments (affecting credit demand).

Profitability should remain satisfactory despite higher provision needs. Margins remain resilient given banks' ability to pass through higher rates to ultimate borrowers and the change in the loan portfolio mix, with fewer government program loans and more retail lending.

Banks will implement the Basel III framework through 2026. We expect banks to adhere to related increases in capital requirements.

What to look for over the next year

industry. Although receding, governability risks are still present, given the fragmentation in Congress and the historical tensions between the executive and legislative branches. We will continue monitoring the impact of political volatility and external factors on Peru's economic prospects and on its financial industry in the short to medium term.

Primary Credit Analyst

Ivana Recalde
Buenos Aires
ivana.recalde@spglobal.com

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Loan growth

Sector-average growth in loans.

6.0% 2024 forecast

2.0% 2023 estimate

3.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.7% 2024 forecast

4.0% 2023 estimate

3.4% 2022 actual

RoAA

Sector-average return on average assets.

1.8%

2024 forecast

2.0% 2023 estimate

1.9% 2022 actual

Figures as of fiscal year ending December.

Trinidad and Tobago | BICRA group: 6

High Oil Prices Spur Economic Recovery

Key takeaways

Trinidad and Tobago (T&T)'s economy will benefit from fairly strong oil prices through the end of 2023 and into 2024. However, global energy prices will continue to cause T&T’s economy to fluctuate in the next few years.

T&T's economic contraction in 2019-2021 continues to pressure banks' asset quality. However, we forecast profits to continue recovering in 2024 as credit growth resumes, net interest margins recover, and provision requirements decrease amid lower credit risks.

Banks entered the economic crisis--caused by COVID-19 and the weak energy sector--with solid loss reserves, capital, and liquidity, which have helped them absorb the economic shocks.

Key credit drivers

Energy dependency. Although banks aren't heavily exposed to the energy sector (about 4% of total loans), T&T's economy heavily depends on oil, gas, and petrochemicals, which have historically accounted for over a quarter of the government's revenue and real GDP and for nearly 80% of exports.

Banks are well prepared to withstand stress scenarios. The impact of the pandemic and the domestic energy sector downturn in recent years caused GDP to contract nearly 10% in 2019-2021. Although the economy has been recovering since 2022, unemployment remains high and pressures debt capacity. However, we think the situation is manageable thanks to banks' conservative provisioning policies and good capital and liquidity.

Key assumptions

Economic growth. We estimate real GDP to grow about 2.5% this year and 1.7% in 2024, but the unemployment rate will remain 6.5%, above the 4.0% before the pandemic.

Manageable credit losses. Banks have been able to contain the damage to asset quality stemming from the recession in past years. However, still high unemployment could squeeze asset quality more than we expect.

What to look for over the next year

Stable administration. We expect that T&T's parliamentary democracy and social cohesion will anchor its political stability and predictability.

Still high unemployment. In our view, unemployment is a key indicator for deeper credit stress in the financial system. Household debt service has risen consistently in the past few years and could be a source of vulnerability if the labor market remains soft for a prolonged period.

Exchange rate. The country's heavily managed exchange rate has resulted in U.S. dollar shortages in the last few years that have constrained economic activity, weakening local businesses' ability to pay suppliers and obtain key imports. The banking system maintains a long position in dollars.

Primary Credit Analyst

Camilo Pérez
Mexico City
camilo.perez@spglobal.com

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Loan growth

Sector-average growth in loans.

6.0% 2024 forecast

7.0% 2023 estimate

8.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.1% 2 024 forecast

3.2% 2023 estimate

3.2% 2022 actual

RoAA

Sector-average return on average assets.

2.8% 2024 forecast

2.7% 2023 estimate

2.6% 2022 actual

Figures as of fiscal year ending December.

Uruguay | BICRA group: 5

Stable Performance Despite Slowing Economic Growth

Key takeaways

GDP growth will slow in 2023, from an average of 5.1% for 2021-2022, and we expect it to average 2.5% thereafter. Well-established institutions will continue to anchor economic stability.

Banks will continue to perform well, with manageable asset quality metrics, high liquidity, stable deposit bases, and adequate solvency.

Banks' profitability will improve due to increased returns in investment portfolios given higher interest rates and stable cost of risk, which will counterbalance the effect of low foreign exchange rate movements on their highly dollarized balance sheets.

Key credit drivers

Asset quality metrics will remain manageable in the next 12-18 months due to banks' conservative credit growth strategies. Nonperforming loans (NPLs) will slightly worsen, but should remain below historical levels because we don't expect new large NPLs or a significant worsening of the retail portfolio.

For the next few quarters, we expect banks' profitability to grow. Increased interest income from investment portfolios and liquid funds given still high local and international interest rates, along with stable cost of risk, will continue supporting profitability. This should counterbalance the low exchange rate movements (considering most banks' active long position in dollars) and higher interest expenses.

Key assumptions

We expect 1.0% real GDP growth in 2023 and an average of 2.5% thereafter. In the next few years, higher consumption as real wages recover and smaller and diversified investment projects in various sectors will sustain GDP growth.

Slow real credit growth. The private sector's access to credit remains low, at about 28% of GDP in 2022, and we expect it will stay near 29% in the next 12-24 months. We forecast 10%-12% nominal credit growth in the next two years, driven by soft recovery in credit demand as investment projects materialize and the economy recovers from the drought, and due to the 4%-5% Uruguayan peso depreciation. However, high interest rates due to contractionary policies promoted by Uruguay's central bank to tackle inflation will continue dampening credit demand, despite recent rate cuts.

The banking system is mainly funded with stable deposits. As of June 2023, the deposit base was steady, with nonresident deposits accounting for 8% of total deposits. We expect the deposit base to remain stable in the next 18 months.

What to look for over the next year

Limited monetary flexibility. High inflation and still elevated dollarization continue to limit Uruguay's monetary policy flexibility. Over half of resident loans and more than 70% of resident deposits are in dollars.

Primary Credit Analyst

Sofia Ballester
Buenos Aires
sofia.ballester@spglobal.com

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Loan growth

Sector-average growth in loans.

12.0% 2024 forecast

10.0% 2023 estimate

8.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.0% 2024 forecast

2.0% 2023 estimate

1.5% 2022 actual

RoAA

Sector-average return on average assets.

2.3% 2024 forecast

2.2% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Europe

Austria | BICRA group: 2

Well Buffered Amid Persistent Structural Issues

Key takeaways

Austrian banks are among the largest beneficiaries of rising interest rates, reflecting their relatively high share of variable interest rate lending, which enabled quick repricing.

While a material deterioration of asset quality metrics is not our base case, downside risk exists amid uncertainties in the economic forecast and customers' debt repayment capacity.

Key credit drivers

In our view, the benefits from higher interest rates have peaked. However, they continue to provide banks earnings buffers to sufficiently mitigate the ongoing increase in operational risk and refinancing costs. While pockets of risk threaten the credit quality of weaker or indebted borrowers, downside is limited for Austria, reflecting the relatively low share of higher risk loans.

Capitalization remains robust. Increased profitability strengthened the systemwide regulatory Tier 1 capital ratio to 17.3% at end-2022, a level that we expect to persist.

Key assumptions

Economic growth is slowing significantly. We anticipate only marginal real GDP growth of 0.3% in 2023, 1.6% in 2024, and 1.5% in 2025. While inflation--projected to be 7.4% in 2023, 4.3% in 2024, and 2.9% in 2025--and rising interest rates pose a risk to growth, we think that the impact on banks' asset quality will be limited. This is because they are buttressed by Austria's high wealth levels, low household indebtedness, and a low unemployment rate, which we expect to remain at or below 5%.

Sound core profitability. We expect the Austrian banking sector's return on average assets (RoAA) to converge to about 0.8% in the medium term. In our view, efficiency will oscillate around 65%, which is not outstanding in the international context, but is sufficient to support banks' profitability through the cycle. At end-2022, the banking system reported 0.9% RoAA and a 59% cost-to-income ratio. A dense branch network, legacy IT systems, and complex institutional structures continue to hinder material sustainable improvements in efficiency and profitability.

What to look for over the next year

Macroeconomic developments. Worsening economic conditions or secondary effects from the geopolitical hotspots, particularly on global energy prices and trade flows, could challenge banks in Austria.

House price development. Our base case is that house prices are likely to continue to decrease in real terms in 2023 and 2024 in Austria, in line with our expectations for Europe. However, we foresee only a gradual correction, both in nominal and real terms. We expect that the decline in house prices, despite being accompanied by a significant increase in interest rates and higher cost of living, will not materially affect the credit quality of Austrian banks' mortgage portfolios.

Primary Credit Analyst

Anna Lozmann
Frankfurt
anna.lozmann@spglobal.com

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Loan growth

Sector-average growth in loans.

1.8% 2 024 forecast

0.8% 2023 estimate

5.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.0% 2024 forecast

1.9% 2023 estimate

1.7% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2 024 forecast

0.8% 2023 estimate

0.9% 2022 actual

Figures as of fiscal year ending December.

Belgium | BICRA group: 2

Banks Can Manage A Rise In Nonperforming Assets

Key takeaways

Economic slowdown persists, with expected GDP growth of 1% in 2023, down from 3.3% in 2022. However, Belgium's medium-term economic prospects remain resilient.

• Banks will likely see nonperforming assets (NPAs) increase in 2024 from the current historical lows, but these should remain manageable.

Belgian banks' healthy capital levels and digitally advanced, bank-insurance business models will continue to help them navigate the economic slowdown.

Key credit drivers

Slowing credit growth in 2023. The rise in private sector borrowing has outpaced GDP growth in recent years (except 2021) as households have taken advantage of low interest rates. Rising rates slowed the annual growth of credit to the domestic private sector in the second half of 2022, with this trend accelerating in 2023. We expect credit growth to stabilize at about 4% per year, below the above 5% recorded during 2016-2022.

economic slowdown. Pressure on the private sector will persist in 2023 and 2024, likely pushing up NPAs and increasing cost of risk from below the 10 basis points reported in June 2023 at the system level. We expect banks to continue to focus on cost-efficiency, as high inflation and ongoing investment in digitalization have driven up their operating costs over the past months. Increasing net interest income--although at a slowing pace as deposit betas increase--as well as revenues from insurance and asset management activities, will continue to counterbalance higher costs, supporting banks’ profitability.

Key assumptions

Belgium will experience slower growth in 2023, with the economy recovering in 2024. We anticipate that a pick-up in business sentiment will bolster domestic economic recovery next year. We expect GDP growth of 1.2% in 2024 and 1.8% in 2025. The labor market is expected to hold-up, with a stable unemployment rate of 5.6%.

Short-lived correction in residential prices in 2023 and 2024. We anticipate a house price correction in real terms in 2023 and 2024, followed by a mild recovery in 2025.

What to look for over the next year

Interest rate pass-through into deposit rates. If competition for deposits or public pressure for higher deposit rates intensifies, this would substantially limit the extent to which banks can take advantage of rising interest rates.

Adaptability to increasing interest rates and efficiency improvements. While higher interest rates will benefit banks’ net interest income, this will likely trail cost increases due to inflation. As a result, disciplined management of asset margins will be important as liability costs rise, while efficiency improvements will be key to banks' ability to maintain profits.

Primary Credit Analyst

Letizia Conversano
Paris
letizia.conversano@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

4.0% 2023 estimate

5.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.2% 2024 forecast

2.0% 2023 estimate

2.0% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2 024 forecast

0.7% 2023 estimate

0.7% 2022 actual

Figures as of fiscal year ending December.

Cyprus | BICRA group: 8

Asset Quality Will Remain Weak, But Earnings Improve

Key takeaways

Despite significant progress, banks' stocks of nonperforming exposures (NPEs) remain among the highest in Europe, and we anticipate this will continue in 2024-2025 amid the weak operating environment.

• Cyprus' links to Russia could threaten its economy and the banking sector.

Banks will maintain their rebalanced funding profiles, but the still-high share of nonresident deposits creates funding volatility risks.

Key credit drivers

Cypriot banks' stock of NPEs will stay high. At 9.5% of gross loans as of end-2022, or about half excluding NPEs under Hellenic Bank's asset protection scheme, Cypriot banks' NPEs remain among the highest in Europe. We expect the sale of legacy problem assets will slow in 2024, and ongoing monetary tightening and slowing economic growth should lead to greater NPE inflows. However, this should be manageable as credit standards are stricter and bank provisions have strengthened.

Profitability prospects, although improving, remain weaker than European peers'. Rising interest rates have bolstered net interest income, with banks’ return on equity peaking at above 13% at end-June from 4.7% in 2022. We expect return on equity will fall to about 10% in 2025, as the cost of funding will adjust. Banks' ability to reduce operating costs, while investing in digital transformation, will be key to offsetting inflationary pressure and still-high credit provisions.

Banks' funding risks are easing, but nonresident deposits remain a source of volatility. Banks' funding comes almost entirely from customer deposits, and reliance on nonresident deposits is high (about 16% of the total, of which less than 5% is from Russia). We expect Cypriot banks' access to wholesale funding will remain modest and expensive.

Key assumptions

Cyprus' economic growth should outpace the EU average. Despite material exposure to Russia and the winding-down of the Cyprus Investment Program (the citizenship-by-investment scheme), growth should settle at just below 3% over 2023-2026.

Credit losses will remain elevated, hampering banks' profitability. We forecast credit losses will remain at about 95 basis points in 2023-2024, owing to persistently high inflation, higher interest rates, and the worsening operating environment.

What to look for over the next year

The government's mortgage-to-rent scheme could address some household NPEs. Even if part of targeted NPEs are already outside the banking sector, this could cushion some deterioration.

Access to funding markets and pricing trends. Even if modestly, the two largest banks will need to tap the markets to fill their minimum requirement for own funds and eligible liabilities buckets by 2025, while nonresident deposits will continue to gradually decline. The ability to contain the cost of funding will be important in sustaining profitability.

Primary Credit Analyst

Regina Argenio
Milan
regina.argenio@spglobal.com

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Loan growth

Sector-average growth in loans.

2.5% 2 024 forecast

-1.0% 2023 estimate

-6.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

9.7% 2 024 forecast

9.1% 2023 estimate

9.5% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2 024 forecast

0.8% 2023 estimate

0.3% 2022 actual

Figures as of fiscal year ending December.

Czech Republic | BICRA group: 3

The Banking Sector Remains Resilient Despite A Shallow Recession

Key takeaways

Czech banks' profitability remains among the best in Europe thanks to high interest margins, sound cost efficiency, and surprisingly low credit losses.

We expect nonperforming assets and credit losses to remain broadly flat over the next 12 months in our base-case scenario.

• A downside scenario would entail an entrenched recession, with rising defaults and credit costs that can weaken banks' financial performance and capitalization.

Key credit drivers

Risk of an entrenched recession persists. Economic conditions in the Czech Republic could deteriorate further, given global growth uncertainty and the stagnation in Europe, particularly Germany. In our base-case scenario, we expect a mild impact on the banking sector's performance, but we foresee a hit to asset quality and profits in our downside scenario of an entrenched recession.

Banks have sound earnings, capital, and liquidity buffers. Even in our downside scenario, with the nonperforming asset ratio rising to 4% and credit losses peaking at 100 basis points in the next 12 months, banks' earnings and capital buffers can comfortably absorb the effects, in our view. The high share of liquid reserves is supportive, and we expect deposit portfolios to remain strong and stable.

Key assumptions

We expect stagnation for 2023. We think GDP growth will slow to 0.2% in 2023 in our base-case scenario as private consumption cools amid falling real wages. For 2024, we anticipate a rebound to 2.0% as domestic demand returns, supported by disinflation, real wage growth, and a very tight labor market. We expect Czech banks to benefit from these conditions after 2023.

The banking sector remains highly profitable. Czech banks have benefited from the sharp rise of policy rates, although higher funding costs had a visible negative impact on profits. Operating expense has also gone up because of inflation. The windfall taxes introduced in 2022 will likely have no financial impact in 2023 for most banks. Despite stronger deposit repricing, Czech banks remain among the most profitable and cost-efficient banks in Europe.

What to look for over the next year

Implications of the Russia-Ukraine war. We expect the Czech economy to weather the economic fallout from the war in Ukraine with limited impact on the banking sector. Conversely, further deterioration of consumer sentiment and reduced business activity could lead to weaker bank performance, particularly through lower demand for loans and higher credit losses.

Potential correction of real estate prices. Residential real estate prices have risen significantly. While unlikely, a further increase of mortgage refinancing rates and higher unemployment could trigger a substantial correction in the housing market. In the downside scenario, we estimate up to 20%-30% nominal decrease in house prices. Nationwide, house prices have mildly corrected, by about 4% nominally since third-quarter 2022.

Primary Credit Analyst

Cihan Duran
Frankfurt
cihan.duran@spglobal.com

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Loan growth

Sector-average growth in loans.

7.0% 2024 forecast

6.5% 2023 estimate

5.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.2% 2024 forecast

2.2% 2023 estimate

2.2% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

0.9% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Denmark | BICRA group: 3

Robust Economy And Sound Asset Quality Support Profits

Key takeaways

• Higher interest rates boosted Danish banks' profitability but it still lags that of many Nordic peers due to limited growth prospects, cost inflation, and high competition.

Denmark's wealth and the government's track record of fiscal support should help banks absorb moderately increasing credit losses resulting from subdued economic prospects in 2023-2024.

Banks rely substantially on wholesale funding, but market depth and a stable domestic covered bond market operating under Denmark's Balance Principle bolster stability.

Key credit drivers

Credit losses are relatively low in a European context. We anticipate that the difficult operating environment since the start of the Russia-Ukraine war, as well as inflation and global economic slowdown, will likely increase credit losses. These should stay manageable, however.

Robust capitalization offsets banks' lagging profitability. Limited loan growth, intense competition, and investments in compliance and digitalization continue to weigh on Danish banks' earnings. At the same time, rising interest rates and cost-efficient stable funding through covered bonds generally support banks' profitability and should facilitate capital buildup from improving earnings retention and funding of moderate shareholder dividends.

Key assumptions

The pharmaceutical sector should spur economic growth. We forecast real GDP growth in Denmark of 1.1% in 2023 and 1.2% in 2024 as pharma offsets weaker performance in other sectors. This is down from 2.7% in 2022 and reflects the effects of the Russia-Ukraine war, global supply-chain bottlenecks, and weaker consumer sentiment.

House prices slowly stabilize. We forecast that the mortgage sector will slowly bottom out, with a 0.7% growth forecast in annual real house prices in 2024, after about an annual 9.0% decrease in the difficult 2022 and 2023 markets. This is because we expect supply and demand fundamentals to gradually normalize under pressure from inflation, difficult markets, and increased mortgage interest rates.

What to look for over the next year

Asset quality trends. We forecast Denmark's resilient economy and high employment will contain nonperforming loans at 1.6% of domestic loans by 2024, mildly up from 1.5% in 2022, and translate into moderate credit losses at a manageable 0.1% by 2024. This is underpinned by banks' balance sheet strengthening in recent years, and tailwinds from the robust economy and the pharmaceutical sector in particular.

Development in house prices and private sector indebtedness. Stabilization of property prices is paramount to asset quality, considering that Danish private sector debt is among the highest in the EU.

Primary Credit Analyst

Harm Semder
Frankfurt
harm.semder@spglobal.com

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Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

1.0% 2023 estimate

-4.1% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.6% 2 024 forecast

1.5% 2023 estimate

1.5% 2022 actual

RoAA

Sector-average return on average assets.

0.4% 2024 forecast

0.4% 2023 estimate

0.2% 2022 actual

Figures as of fiscal year ending December.

Finland | BICRA group: 2

Banks Will Generate Record Earnings Despite Stagnating Economy

Key takeaways

• The Finnish banking sector benefits from higher interest rates owing to banks' floatingrate loan books, and we anticipate materially improved profitability in 2023-2024.

• The weak economic outlook and low private-sector confidence will limit credit demand.

We expect banks’ asset quality to remain intact due to sound labor market conditions, a strong social safety net, and prudent underwriting standards.

Key credit drivers

Higher interest rates will boost profitability. Finnish banks’ loan books are tied to EURIBOR, and ongoing loan repricing will fuel operating income. The interest rate pass-through remains limited and we expect the deposit margin to adjust with a lag. We project net interest income and overall profitability will stay solid through 2024.

We believe credit growth will remain muted. Household debt decreased to 126.6% of disposable income in June 2023, and we expect this to continue as demand for credit remains modest. Overall debt remains lower than that of Nordic peers and the labor market supports household repayment capacity even with high interest rates, but we cannot exclude somewhat weaker asset quality.

A material house price correction is unlikely. We expect the housing market to remain quiet into 2024, as consumer confidence and increased living and debt service costs delay households' decisions. We project house prices will decrease 5% in 2023 but pick up in 2024 as inflation eases and households’ pent-up demand is released.

Key assumptions

The economy is stagnating. Finland's economy is set to stall in 2023, followed by GDP growth of 1.25%-1.50% in 2024-2025. Still-elevated inflation and increased credit costs are weakening investment and consumption, and the export outlook is soft.

Revenue growth will support improved operating efficiency. Credit demand growth is likely to stay low amid economic uncertainty. Increased interest income will allow for better cost-efficiency metrics despite ongoing IT overhauls and continued investment in digitalization and automation.

What to look for over the next year

The influence of external factors. Finland's small, open economy depends on trade with eurozone members, so economic developments across Europe will be key over the next year.

Market consolidation. The exit of Handelsbanken in Finland has opened growth opportunities to second-tier banks, and we think the number of banks and branches will continue to decrease through mergers and amalgamations.

Potentially higher credit losses beyond our base-case scenario. A weaker labor market and deteriorating business and consumer confidence could lead to financial distress, especially in the real estate and construction sectors, leading to greater credit losses than we currently expect.

Salla von Steinaecker
Frankfurt
salla.vonsteinaecker@spglobal.com

Primary Credit Analyst

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Loan growth

Sector-average growth in loans.

1.3% 2024 forecast

0.0% 2023 estimate

2.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.6% 2 024 forecast

1.5% 2023 estimate

1.4% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2024 forecast

0.8% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

France | BICRA group: 3

Diversified Business Models Cushion Asset-Quality Deterioration

Key takeaways

• We expect some credit deterioration for French domestic activities as the operating environment becomes less supportive. Pockets of credit risk may surface without a material impact on sector performance.

Profitability is still a significant challenge for the industry. The positive impact of higher interest rates is materializing more progressively than in other countries, while inflation is raising costs and cost inefficiencies remain.

Still, French banks' fundamentals remain sound, with diversified banking and insurance activities and robust balance sheets supporting the sector's creditworthiness.

Key credit drivers

Diversification beyond retail and commercial banking--in insurance, asset management, investment banking, or specialist finance. French banks derive benefits from their universal business models, a lower share of interest-sensitive activities than other markets, and high domestic market concentration. This typically yields relatively stable and recurring earnings.

Interest rate rises haven't boosted net interest margins to the same extent as for European peers, because French banks' liabilities reprice more quickly than their assets, such as fixed-rate mortgages. Higher rates will have a more favorable effect on French banks by midyear 2024. French banks have a more stable cost of risk than other European banks, and credit costs will normalize rather than spike.

Key assumptions

A sharp slowdown in economic growth. We envisage 0.8% GDP growth for France in 2023 and 0.9% in 2024. We forecast unemployment will stay below the 2019 level, at 7.5% in 2024 and 2025. Inflation peaks at 5.9% in 2022, declining to 5.6% in 2023 before reverting toward 2.0% in the following years.

Credit growth is likely to slow but remain at about 3% per year, with contained asset-quality deterioration. Asset quality is structurally supported in France by fixed-rate mortgages, so don't deteriorate significantly when interest rates rise. Defaults should increase in the coming two years, mainly for corporates and small and midsize enterprises, as well as consumer lending. We project domestic nonperforming assets (NPAs) will increase to 2.8% of domestic loans by year-end 2025.

What to look for over the next year

Economic developments. Lower economic growth, tighter funding conditions, and high, more persistent inflation are headwinds for banks' asset quality, business prospects, and cost management. A material downward revision of our macroeconomic forecasts or our credit loss projections could challenge our view on ratings in the sector.

Profitability is typically undermined by both tight margins and cost inefficiencies. We will look at market discipline to manage asset margins as liability costs rise. Moreover, we will track efficiency improvements, which will be key for banks to maintain profitability.

Primary Credit Analyst

Paris nicolas.malaterre@spglobal.com

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Loan growth

Sector-average growth in loans.

3.0% 2024 forecast

3.0% 2023 estimate

4.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.6% 2024 forecast

2.2% 2023 estimate

2.1% 2022 actual

RoAA

Sector-average return on average assets.

0.4% 2 024 forecast

0.3% 2023 estimate

0.3% 2022 actual

Figures as of fiscal year ending December.

Germany | BICRA group: 3

A Vulnerable Export-Oriented Economy Could Pose Risks

Key takeaways

Germany's economic trajectory is highly susceptible to external developments such as energy price movements and slowdown or disruption to global trade flows.

However, ample buffers for both the private and public sectors support the resilience of German banks' asset quality and capitalization, for now.

• The rise in monetary policy rates heavily supports interest-income-dependent and deposit-funded German banks, but structural profitability issues persist.

Key credit drivers

Elevated geopolitical risks make the export-centric economic model more vulnerable. Germany's economic trajectory is highly susceptible to external developments such as energy prices, and to open global trade flows. This is because its deep integration in the global economy makes it more susceptible to deteriorating global economic conditions, be it from a further escalation of the Russia-Ukraine war or increasing tensions between the EU and either the U.S. or China. However, the German economy historically also demonstrated it can absorb large economic shocks due to its diversified and competitive economic structures and comparatively low leverage. The German government also has ample fiscal capacity and willingness to implement countercyclical measures-- for example, the substantial fiscal stimulus and wide-ranging support during the pandemic.

Key assumptions

Germany avoids a deeper recession for now. Under our base-case assumptions, the country's economy will stagnate in 2023, with a GDP contraction of 0.2%, after real GDP growth of 1.8% in 2022. We expect muted growth of about 0.6% in 2024.

Asset quality remains relatively resilient under our base-case scenario, while German banks' profitability cushions widen from higher interest margins. We expect nonperforming loans and credit costs to increase manageably from historical lows, helped by the relative resilience of the German economy and corporate sector, sustainably very low unemployment, and solid German household, corporate, and public finances.

What to look for over the next year

Wider net interest margins boosting bank profits. We expect return on equity to improve to 5.6% by 2025--which was last seen before 2018 but is still modest--helped by tailwinds from better net interest margins and relatively robust asset quality.

A possible downside scenario that could more than wipe out any benefit from rising interest rates. Vulnerabilities in global banking markets remain high. Possible monetary policy overshooting or unexpectedly higher stress in segments such as commercial real estate or real estate development could quickly cause stress in the German banking system.

Primary Credit Analyst

Harm Semder
Frankfurt
harm.semder@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

2.5% 2023 estimate

6.8% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.1% 2024 forecast

1.2% 2023 estimate

1.0% 2022 actual

RoAA

Sector-average return on average assets.

0.5% 2024 forecast

0.4% 2023 estimate

0.3% 2022 actual

Figures as of fiscal year ending December.

Greece | BICRA group: 7

The Outlook Remains Positive, As Strong First-Half Results Show

Key takeaways

Greek banks’ overall financial results confirm that they are reaping the benefits of the strong balance sheet transformation in the past four years.

• The systemwide nonperforming exposure (NPE) ratio will be 4%-6% in 2024.

Funding risks have diminished as banks repay much of their targeted longer-term refinancing operations borrowings, and long-term debt issuance abroad gains momentum.

Key credit drivers

Banks continue to dispose of many NPEs, thanks to the strong interest from foreign bad debt servicers. Given this, and new lending from healthier businesses, we expect the system's domestic NPE ratio will decrease below 5% by end-2025 through sales and organic recoveries. We expect the organic cost of risk to remain near 80 basis points for most banks in the next 12-18 months.

Capital quality is still weak, and prospects for improvement remain low, restraining bank ratings.
Deferred tax credits constitute over 65% of banks' equity base and are amortized in small amounts.

The banks’ earning capacity is improving. Lower cost of risk, higher interest margins, strong fee and commission income, resumption of credit demand, and improved operational efficiency are supporting gains. Greek banks have streamlined their operations through cost-efficiency measures and sales of noncore assets, leading the banks' cost-to-income ratios to improve to 40% or below on average. Banks’ interest margins benefit from elevated rates.

Key assumptions

Real GDP growth is likely to cool in 2023 but remain above euro area peers' at an estimated 2.5%, underpinned by investment, higher tourism, falling unemployment, and broader private credit support. The tourism sector is doing particularly well--data show Greece had its best ever first-half for inbound travelers since records began, and travel and transportation receipts in the first seven months of the year were 118% of comparable 2019 levels.

High demand from distressed asset managers for bad Greek loans will persist. The positive outlook in domestic property markets and increased recovery prospects due to the judicial reforms in the past decade will support this.

The ongoing absorption of the EU's support funds will bolster demand for new corporate loans. We expect banks’ loan books to expand by 3%-4%, though the potential for underperforming remains high due to economic risks.

What to look for over the next year

Greek banks resuming dividend payments, for the first time since 2009. Banks are waiting for final regulatory approvals to distribute dividends starting from 2024.

The Hellenic Financial Stability Fund's disposing of stakes in Greek banks. This could lead to changes in banks' ownership.

Primary Credit Analyst

Goksenin Karagoz

Paris goksenin.karagoz@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

3.0% 2024 forecast

1.0% 2023 estimate

6.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.4% 2 024 forecast

5.9% 2023 estimate

6.6% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

1.1% 2023 estimate

1.2% 2022 actual

Figures as of fiscal year ending December.

Hungary | BICRA group: 5

Government Intervention Is A Mixed Blessing

Key takeaways

Despite challenging operating conditions, we do not expect Hungarian banks' asset quality to deteriorate materially as the government has taken measures to protect borrowers.

Rising interest rates have boosted banks' profitability, however this is partly offset by additional taxes and extraordinary items, as the government continues to intervene in the financial sector and to siphon off extra profits.

Key credit drivers

Government measures support household resilience. The Hungarian government is mitigating households' credit risk from rising interest rates through various measures, such as increasing the share of subsidized loans and capping interest rates. We expect credit growth to stabilize at about 5%-7% annually due to subsidized programs for retail and small and midsize enterprises. In our base case, we do not expect a material weakening of banks' asset quality, despite declining real incomes from higher inflation.

A nominal decline in house prices lowers the risk of overvaluation. Following a tightening of monetary conditions and lower demand, house prices weakened by about 4% quarter-on-quarter in fourth-quarter 2022, with the number of transactions falling to 2013 levels, similar to European peers. As wage growth remains strong due to the sound labor market, risk of overvaluation has decreased significantly.

Monetary policy normalization supports banks' profitability. The strong increase in net interest income following the central bank's significant interest hikes is partly offset by several one-off items. Hungarian banking and windfall taxes, as well as interest rate caps, continue to weigh on the sector's profitability in 2023.

Key assumptions

Economic growth remains lower than in the recent past. We anticipate a GDP decline of 0.26% in 2023, given low domestic demand and external pressure, inducing a recession in the country. We expect inflation will return to single digits; to about 9% by the beginning of 2024, from 18.1% this year. In our view, EU funds will not be forthcoming for longer than anticipated as bilateral talks are intertwined with aid to Ukraine.

What to look for over the next year

Deposit re-pricing is underway. With liquidity still abundant and low competition, Hungarian banks have been slower than peers to reprice deposits. While this could spur additional profits, banks might face material shifts to term deposits from sight deposits, as well as to alternative investment opportunities, creating refinancing risk.

Continued government intervention. Following several extraordinary legislative proposals--like the deposit cap, which was criticized by European institutions--the Hungarian government announced new interest caps on loans in October 2023 to boost lending to companies and households and revive the construction sector.

Primary Credit Analyst

Lukas Freund
Frankfurt
lukas.freund@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

6.2% 2024 forecast

5.0% 2023 estimate

12.3% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.5% 2 024 forecast

3.6% 2023 estimate

3.0% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2 024 forecast

0.7% 2023 estimate

0.9% 2022 actual

Figures as of fiscal year ending December.

Iceland | BICRA group: 5

Benign Operating Conditions Despite Tighter Credit Conditions

Key takeaways

• Icelandic banks are enjoying strong earnings growth amid higher interest rates and increased domestic economic activity.

• Housing market imbalances remain wide, although underlying price growth has abated.

Persistent inflation and rising debt serviceability pressures could weigh on asset quality, and still-difficult external funding markets remain a challenge.

Key credit drivers

Strong revenue generation and sound operating efficiency should ensure robust profitability. In our base-case scenario, we expect average return on equity for domestic, systemically important banks to increase toward 11%-13% in the next two years. We consider this level strong compared with that of other developed market banking jurisdictions.

fundamentals. Housing market activity has slowed markedly in 2023 and nominal property price growth gradually abated to 2.3% year-on-year in September, from the mid-2022 peak of close to 25%. With persistent inflation, projected to average 8.5% in 2023 and 4.8% in 2024, we now expect a mild real property price correction over the next 12-18 months.

Key assumptions

Momentum is slowing, but solid growth is ahead. We expect Iceland's economy will continue to expand faster than that of most European countries, with real GDP growth forecast at 3.3% in 2023 and 2.5% per year in 2024-2025, underpinned by resilient-but-slowing domestic demand and a continued strong tourism sector.

Banks will remain profitable in 2023-2024. We expect operating conditions to remain benign, with higher net interest income comfortably offsetting upward pressure on operating expenses, including cost of risk, resulting in sectorwide return on average assets of 1.6%-1.7%.

What to look for over the next year

Growth dynamics and external demand. Although we anticipate that higher interest rates will start weighing on borrowers' debt service capacity, we expect strong economic activity and robust employment to support banking sector asset quality. Unexpected shifts in key export sectors, for example due to changes in global travel preferences, could alter our outlook for Iceland's small open economy. We are monitoring conditions in external funding markets given the potential for constraints on banks' foreign currency lending, although issuance in 2023 has effectively lowered near-term refinancing risks.

A residential property market correction. We expect flat or moderately rising nominal prices in 2024, with tight monetary policy balancing resilient underlying demand. Nevertheless, given rising debt service costs and still-wide house price imbalances, we remain mindful of a sharper correction and will monitor housing market developments closely.

Primary Credit Analyst

Niklas Dahlstrom

Stockholm niklas.dahlstrom@spglobal.com

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Loan growth

Sector-average growth in loans.

5.0% 2 024 forecast

5.0% 2023 estimate

11.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.7% 2024 forecast

1.6% 2023 estimate

1.5% 2022 actual

RoAA

Sector-average return on average assets.

1.6% 2 024 forecast

1.7% 2023 estimate

1.5% 2022 actual

Figures as of fiscal year ending December.

Ireland | BICRA group: 3

Irish Banks Will Keep Up Solid Profitability And Asset Quality

Key takeaways

Irish banks' profitability, supported by high interest rates, will remain solid in 2024 even if lending growth stays modest and margins start to decrease.

• Asset-quality metrics are likely to hold up at about target levels, despite the potential emergence of new problem loans.

We expect Irish bank's robust capitalization and sound funding profiles will underpin their resilience.

Key credit drivers

Higher-for-longer interest rates will support banks' profitability. Margins will gradually contract, however, due to anticipated pass-through of higher interest rates to deposits, which has been very limited so far. However, thanks to higher interest income, larger economies of scale following market consolidation over the past two years, and focus on costs, Irish banks will preserve their solid profitability next year, though we expect it to be below the extraordinary level anticipated for 2023. We forecast the sector's domestic return on equity to average about 11% in 2024.

Systemwide problem loans could be close to 3% over the next year. Reducing but still elevated inflation and high interest rates will pressure the private sector's debt-servicing capacity. We anticipate the emergence of additional problem loans, mostly among small and midsize enterprises. We expect the deterioration to be manageable because the inflow of new nonperforming assets (NPA) will largely match the outflow of cured NPA and volume of NPA portfolio sales.

Key assumptions

Ireland's economy to slow but still outperform peers. Growth of Ireland's gross national income, a measure of underlying economic activity, is expected to slow to about 2.0% in 2023 before an uptick to 2.3% in 2024. These figures are well ahead of sluggish eurozone GDP growth of 0.6% and 0.9% respectively. The labor market will remain tight however, with unemployment at about 4.5% in 2023- 2024.

Inflationary pressure to ease. Inflation is forecast to decelerate from 8.1% in 2022 to 5.3% for 2023 and further to 2.7% in 2024. This should help reduce inflationary pressure on both operating costs and borrowers' debt-servicing capacity.

What to look for over the next year

Faster passthrough of interest rates to deposit rates. The interrelation between deposits and loan repricing is key for banks' margins and, therefore, their profitability.

Structural efficiency improvements. Positive business momentum and significant growth of revenue should underpin domestic banks' digital agendas and support further investment in systems and automation aimed at improving banks' long-term cost efficiency.

Primary Credit Analyst

Anastasia Turdyeva
Dublin
anastasia.turdyeva@spglobal.com

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Loan growth

Sector-average growth in loans.

1.4% 2024 forecast

0.7% 2023 estimate

1.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.4% 2 024 forecast

3.3% 2023 estimate

3.6% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.8% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

Israel | BICRA group: 3

Risks Are Rising Amid Conflict And Related Uncertainty

Key takeaways

• An escalation of geopolitical risk could hurt the economy and banking sector.

• Israeli banks face increasing risks with sound credit fundamentals.

• Structural challenges remain, including banks’ sizable exposure to the real estate sector.

Key credit drivers

Banks face higher risks amid increased geopolitical conflicts and economic slowdown. Over previous decades, Israel has experienced several military escalations around Gaza, but we consider the current developments to be of a greater magnitude. We see a risk that banks might face protracted deterioration of economic prospects and credit conditions, with a decline in revenue and substantial increase in credit losses. We expect the impact on asset quality to be somewhat mitigated by government-sponsored measures.

Real estate-related lending remains a source of risk. Banks' exposure to real estate lending has increased materially since 2020. Moderate loan-to-value ratios (averaging 54.1% at year-end 2022), conservative underwriting standards, and structurally high demand mitigate risks. Yet we think the real estate sector is among the most vulnerable in the current situation. A potential drop in sales could pressure developers and construction companies with limited financial flexibility. In addition, there is a risk of technology firms moving out of Israel if conditions remain uncertain, with negative implications for the office sector.

Key assumptions

The war will hamper Israel's economy for a short period, followed by a steady recovery. Our current base case is that the conflict will likely be mostly contained to Israel and Gaza, and last no more than three to six months. We now forecast real GDP growth to slow to 1.5% in 2023 and 0.5% in 2024, and accelerate to 5% in 2025 as confidence returns and reconstruction and the investment cycle kick in more fully. We see a high degree of uncertainty, however, about the extent and duration of military hostilities. If the conflict widens materially, Israel's economic growth, fiscal position, and balance of payments could deteriorate significantly.

Sound credit fundamentals provide some buffers. In our view, Israeli banks are facing this conflict with healthy asset quality metrics, ample liquidity, and earnings buffers, coupled with stable, largely domestic deposit bases, and strong profitability and capitalization. In our base case, higher interest rates and exposure to assets linked to the consumer price index will fuel nominal revenue growth but could test the banking system's asset quality if economic growth falters.

What to look for over the next year

Evolution of the conflict, its duration, escalation, and potential spread to the region. The impact on Israel's economy and business confidence would have negative consequences for banks' creditworthiness.

Primary Credit Analyst

Regina Argenio
Milan
regina.argenio@spglobal.com

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Loan growth

Sector-average growth in loans.

1.0% 2024 forecast

6.0% 2023 estimate

12.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.6% 2 024 forecast

1.3% 2023 estimate

0.9% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.8% 2023 estimate

1.5% 2022 actual

Figures as of fiscal year ending December.

Italy | BICRA group: 5

Stronger Asset Quality To Weather Economic Risks

Key takeaways

• Italian banks' enhanced resilience will be tested more in 2024 than in 2023.

• Credit losses will eventually increase but likely less than we previously anticipated.

• Differences among banks will become increasingly apparent.

Key credit drivers

The economy will decelerate without a recession in our base case. Tighter financing conditions and a bleaker growth outlook in Europe will lead to a further slowing of Italy's economy in 2024, with GDP growth of 0.7% before a rebound to about 1.3% in 2025, supported by Next Generation EU Funds.

Significant asset-quality deterioration is unlikely. Better underwriting standards, more proactive management of riskier loans, and more prudent provisioning make asset quality more resilient than in the past. The legacy stock of nonperforming exposures (NPEs), net of provisions, was a historically low 1.5% in June 2023. Still, we expect asset quality to normalize, with credit losses increasing to about 70-80 basis points (bps) in 2024, below our previous expectations of about 100 bps.

Strengthened capitalization and increased earning capacity will provide a cushion in a more adverse scenario. A strong rise of net interest income and overall stable operating expenses bolstered profitability in 2023, with return on equity likely peaking at 10%, by our estimate. Preprovision income will moderately decline in 2024, as cost of funding increases, but will remain well above the pre-interest hike level. We now expect that pre-provision income will materially exceed credit provisions over the next two years.

Key assumptions

The interconnection with sovereign risk has declined but remains high. Compared with a decade ago, Italian banks operate with a larger funding surplus, as deposits exceed loans and reliance on wholesale funding sources is quite contained. Still, the banking system remains more exposed to market volatility than peers, primarily because of weaker sovereign creditworthiness.

Next Generation EU funds will play a key part of future growth. Given the sheer size of the recovery plan, using even a portion of these EU facilities would meaningfully boost growth. Still, we think that delays to future disbursements could dent economic performance.

What to look for over the next year

Economic slowdown will test banks' resilience. Most institutions are in a position of strength, with healthy buffers. The differences among banks might become increasingly evident in terms of cost of funding (after years of cheap access for all), asset quality metrics, and operating efficiency.

The end of TLTRO III. Most banks should be able to pay back these funds while maintaining adequate liquidity and net stable funding ratios. Most plan to partly replace the funds through other sources, predominantly collateralized funding. Some banks might struggle to raise medium- or longterm funding and could suffer if market conditions worsen.

Primary Credit Analyst

Mirko Sanna
Milan
mirko.sanna@spglobal.com

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Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

-3.0% 2023 estimate

0.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.8% 2024 forecast

3.9% 2023 estimate

3.5% 2022 actual

RoAA

Sector-average return on average assets.

0.5% 2024 forecast

0.6% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

Liechtenstein | BICRA group: 2

A Resilient Banking Sector

Key takeaways

Liechtenstein's banking sector is less susceptible than its European peers to swings in its domestic economy, and risks remain low.

We expect banks will stay resilient and report low credit losses, although extreme market volatility can lead to margin calls and, possibly, losses on Lombard lending despite generally conservative risk management.

Liechtenstein's banks remain sensitive to reputation risk notwithstanding the principality's transformation into a more transparent financial center.

Key credit drivers

The system faces strong competition and profitability pressure. Increased rates slightly reduced stress on interest margins, but competition in global private banking remains high and requires ongoing investment in digital.

Banks remain vulnerable to reputational risk, despite improved transparency. Liechtenstein has fully implemented EU sanctions against Russia and we expect banks to fully comply. Also, only a minor proportion of assets under management (AUM) relates to Russian clients, and this doesn't represent a material risk to the banking system.

Key assumptions

Liechtenstein's banks should resist economic headwinds. We forecast only marginally positive real GDP growth in 2023 and 1%-2% growth in 2024. Inflation and related increases in central bank rates were much more limited than countries in the EU, so will not derail the economy.

Lending is likely to remain low-risk. Banks' sound risk management practices and predominantly collateralized and low-risk lending to wealthy customers suggest that their traditionally low credit losses are unlikely to increase materially in a downturn.

What to look for over the next year

Material setbacks in financial markets and global wealth levels, which could lower AUM. This would reduce profitability and limit the capacity to invest in digital competencies and operational automation.

Banks' appetite for external growth amid very limited opportunities in the small domestic market. Large acquisitions or asset transactions could reduce capitalization. We expect consolidation among private European banks to continue as smaller players might not be in a position to cope with increasing investment needs and onerous regulatory requirements. Cyclical tailwinds to profitability could delay (but not stop) consolidation.

Primary Credit Analyst

Heiko Verhaag
Frankfurt
heiko.verhaag@spglobal.com

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Loan growth

Sector-average growth in loans.

2.1% 2024 forecast

1.3% 2023 estimate

6.5% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.2% 2024 forecast

1.3% 2023 estimate

1.2% 2022 actual

RoAA

Sector-average return on average assets.

2024 forecast

0.4% 2023 estimate

0.3% 2022 actual

Figures as of fiscal year ending December.

Luxembourg | BICRA group: 2

Solid Earnings Amid High Interest Rates And Slowing House Market

Key takeaways

Luxembourg's GDP per capita is among the highest in the world, with expected growth of nearly 2% annually in 2023-2025, low government debt, and relatively low unemployment.

Banks are generating strong interest income in 2023 and we expect the cost of credit risk to remain low, but mortgage lending is declining amid rising interest rates and as the real estate market started to slow late in 2022.

Complicating supervision are many banks being subsidiaries of foreign groups and the large nonbank financial sector; generally, financial institutions remain vulnerable to regulatory and reputation risks.

Key credit drivers

Luxembourg's real estate market. The housing sector is a significant driver of the economy, and housing loans represent the largest part of the banks' portfolios and lending growth.

Private-sector credit growth. While domestic credit growth outpaced GDP until 2020, which shaped our view of potential imbalances, annual loan growth has stabilized below 5% and credit risk is low.

Key assumptions

Normalization of the housing market. We expect nominal house prices to decrease 5%-10% in 2023. We think the market slowdown is temporary and will result in a soft landing after annual price increases averaging above 10% in 2018-2020, exceeding 15% in 2020 alone. We see Luxembourg's economic growth, demographics (boosted by cross-border worker flows), and limited real estate availability as structural supportive factors.

Low growth in mortgage lending. Amid high interest rates, and with inflation still at 2.5%-3.0% in 2023-2024, we anticipate limited growth in domestic mortgage loan portfolios.

Resilient earnings. We think banks will maintain prudent underwriting despite lower credit demand and cost of credit will remain below 0.4% of customers loans. We expect strong earnings in 2023, but interest income will decline from 2024, reflecting materially lower volumes in mortgage lending, and as the migration from nonremunerated to term deposits will contribute to higher costs of funding.

What to look for over the next year

House prices and net interest margins. We believe the slowing real estate market will drive a period of contained decrease in house prices, a normalization after several years of rapid increase in prices, which peaked in second-half 2022. The respective paces of increase in funding costs and of repricing on the asset side, and resulting trends in terms of net interest margin, will determine to what extent benefits from high interest rates for revenue will fade away from 2024.

The approach to international tax initiatives. Luxembourg's position as a financial center makes it vulnerable to fiscal and regulatory changes. Its tax regime depends on international initiatives, but it has sufficient fiscal flexibility to manage these changes efficiently, in our view. Also, the country's headline corporate tax rate of 17% is adequate by international standards. More broadly, the banking sector is confidence sensitive and remains vulnerable to regulatory and reputation risks.

Primary Credit Analyst

Francois Moneger

Paris francois.moneger@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

3.0% 2023 estimate

5.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.8% 2 024 forecast

0.6% 2023 estimate

0.6% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.8% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

Malta | BICRA group: 5

Rising Rates Pose Low Risk If Economic Conditions Stay Supportive

Key takeaways

We expect the Maltese economy to prove resilient to external challenges and continue to expand in 2024 and 2025.

• Although the evolution of property prices is something to watch, sound fundamentals mitigate the risk of a sharp correction in the real estate market.

• We think reputation risks for domestic banks will gradually abate, thanks to recent progress in strengthening banking supervision.

Key credit drivers

Economic conditions should support the banking sector. We expect real GDP growth to average 3% over the next two years, largely due to tourism and gaming, compared with about 0.8% for the eurozone. High household savings of 37% will ease the impact of inflation and tighter credit conditions on real income. We estimate EU funds of about 16% of GDP will add 0.3%-0.8% to growth on average.

Credit losses and higher operational costs will weigh on profitability, despite rising net interest income. We assume credit losses will increase to 50-55 basis points over the next two years, which is still relatively manageable for the banking sector.

Funding and liquidity profiles will remain solid. The banking system operates with a sizable deposit surplus compared to loans, and barely any net external debt. While we remain prudent on the stability of these deposits compared with those in other larger EU economies, we consider funding and liquidity key strengths for Malta's banking sector.

Key assumptions

Fundamentals support high house prices. The real estate market benefits from Maltese citizens' preference for owning homes, interest from residents of other countries, as well as government incentives. Still, the potential build-up of imbalances is a risk, given that 60% of total bank loans relate to real estate.

Reducing reputation risks requires work. We view as positive the authorities' progress in strengthening supervisory and enforcement effectiveness. But Malta still needs to show significant progress in identifying risks and challenges in banking regulation and supervision to be considered on par with the other eurozone countries.

What to look for over the next year

The weakening global economy's effect on Malta. The country's small and open economy is vulnerable to increasingly likely external shock. In particular, disruption in global trade and tourism, alongside elevated energy prices, could hit this economy hard.

The real estate market's performance. The regulator has enacted policy measures to reduce the risk of imbalances, including increasing risk weights for residential mortgage loans and stricter lending requirements at origination, in the form of limits on loan to value and debt-service to income.

Primary Credit Analyst

Mirko Sanna
Milan
mirko.sanna@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

2.0% 2023 estimate

8.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.9% 2024 forecast

4.0% 2023 estimate

3.8% 2022 actual

RoAA

Sector-average return on average assets.

2024 forecast

0.5% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

Norway | BICRA group: 2

Strong Fundamentals Should Help Banks Weather The Slowdown

Key takeaways

Norwegian banks continue to have strong capital and liquidity buffers, which, in addition to a dynamic economy and the sovereign wealth fund’s ample reserves, underpin the banking sector.

Asset quality is set to remain relatively strong compared with European peers', aided by high employment and non-mainland investment, although a more challenging growth climate may pressure certain sectors.

Key credit drivers

Consumption and GDP growth are softer amid a bleaker macroeconomic backdrop. Norway has navigated 2023 from a strong position, with inflation and tighter monetary policy continuing to dampen consumption. A weaker Norwegian krone and rising input and labor costs are restricting certain businesses.

Households are taking rising interest costs in their stride. A supportive labor market and amassed savings have cushioned households against higher interest rates and living costs. House prices in Norway did not spike during the pandemic, and while households are considered highly indebted, we expect real estate prices to remain relatively stable compared with Nordic peers.

Banks are capital rich, digitally advanced, and show strong profit growth. These factors, as well as increases of the countercyclical capital buffer, put the banking sector in a good position to manage potential weakening asset quality. Higher net interest income and continued high efficiency should sustain solid results in 2023, and liquidity looks sound. Weaker operating conditions will likely push up losses, but banks will remain resilient over the next few years.

Key assumptions

Real GDP growth slowing to 1.2% in 2023 from 3.3% in 2022, then averaging 1.6% over 2024-2026. The decline will stem from high inflation and interest rates eroding households' purchasing power. Oil and gas prices, despite having cooled, will continue to support hydrocarbon-related exports and investment. Substantial investment in the energy transition will also support growth in 2023-2024.

The cost of risk stays manageable despite pressure on credit growth and asset quality. Impairment losses remain close to pre-pandemic lows, indicating limited scope for further reversals among large banks. We expect credit losses to increase to 0.1%-0.2% in 2023, from 0.05% at year-end 2022.

What to look for over the next year

The impact of global economic patterns. Widespread inflation, increased interest rates, and weaker growth internationally will likely soften domestic economic growth in Norway.

Indebted corporations' exposure to rising interest rates. Nonperforming loans and losses on corporate portfolios will be manageable in 2023. Higher interest rates could lead to an increase of arrears in some sectors. Commercial real estate (CRE) values are falling and banks will need to manage the refinancing of large maturities, as well as risk related to CRE loans over the coming years.

Primary Credit Analyst

Olivia Grant

Stockholm olivia.grant@spglobal.com

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Loan growth

Sector-average growth in loans.

1.0% 2 024 forecast

2.7% 2023 estimate

5.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.7% 2024 forecast

0.7% 2023 estimate

0.8% 2022 actual

RoAA

Sector-average return on average assets.

1.1% 2024 forecast

1.1% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending June.

Poland | BICRA group: 4

Strong Operating Profits Buffer Legal Risks For Affected Banks

Key takeaways

• We expect the economy, specifically employment, to prove resilient despite Poland's proximity to the Russia-Ukraine conflict and still elevated, though decreasing, inflation.

• We expect ongoing provisioning needs for those banks affected by legal risks related to legacy Swiss franc-denominated mortgages to be covered by banks' operating profits.

New loan demand remains weak for now and net interest margins will gradually decline because of falling central bank rates, but we expect overall profitability to remain robust.

Key credit drivers

Litigation costs relating to legacy foreign-currency mortgages remain a key risk. Although even the most exposed banks should be able to absorb these costs, risk could still lead to instability, should the operating profitability buffer shrink faster than expected or court rulings indicate even higher costs than we currently anticipate.

partners. We expect employment levels to prove very resilient, shielding asset quality in retail banking from larger deteriorations. Despite a weak economic growth outlook for the key trading partner Germany, we also expect the Polish corporate sector to largely prove its resilience.

Key assumptions

We expect only a very moderate GDP rise in 2023, and improving prospects beyond. The domestic growth outlook for 2024-2025 remains solid and should benefit from unlocked EU funds.

We expect the National Bank of Poland will prove effective in bringing down core inflation. Amid declining inflation, we expect further material reductions in policy rates over 2024. It remains uncertain when the inflation target of 2.5% plus or minus 1 percentage point will be reached, as core inflation could prove sticky.

What to look for over the next year

The new government's approach toward the banking sector. After years of high government involvement, there is potential for reduction of political intervention, which could be supportive for banks' profitability.

Court decisions on foreign-currency mortgages and success of settlement programs. Progress of out-of-court settlements could be costly but will gradually improve stability by cleaning legacy issues. Chances of a legislative solution are low in our view.

Increased costs of living and financing, coupled with moderate economic growth, will continue to weigh on asset quality, especially for unsecured consumer loans and loans to small and midsize enterprises.

Primary Credit Analyst

Frankfurt heiko.verhaag@spglobal.com

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Loan growth

Sector-average growth in loans.

4.4% 2024 forecast

-1.9% 2023 estimate

1.3% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.8% 2024 forecast

5.8% 2023 estimate

5.2% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

0.8% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

Portugal | BICRA group: 5

Solid Banking Profits Amid A Resilient Economic Environment

Key takeaways

• Portugal boasts more solid economic prospects than its European peers thanks to its small and open economy and resilient labor market.

In 2024, banks should preserve the healthy profitability achieved in 2023, although further upside on net interest margins will be limited.

• Tighter financial conditions and a lower private-sector savings rate will likely prompt an increase in credit provisions and problem loans, but the effect should be manageable.

Key credit drivers

Asset quality deterioration will become more evident but should be manageable. We expect problem loans to rise modestly, as higher financing and operating costs pressure the private sector. The impact for banks should be manageable as long as the employment rate holds. We forecast credit losses (cost of risk) of about 60 basis points (bps) in 2024 (55 bps estimated in 2023 and 42 bps in 2022) and 1%-3% credit growth.

Banks will maintain the profitability levels achieved in 2023. We expect limited upside on net interest margins in 2024, following the improvement in 2023 from rising rates and the high share of floating-rate loan books (90% of mortgages). Controlling the repricing of deposits will be key to preserve margins in 2024. Portuguese banks should remain efficient, with a systemwide cost-toincome ratio of about 47%. We forecast return on equity of about 9%-10% in 2024 on a consolidated basis--in line with our estimate for 2023--supporting internal capital generation.

Banks will maintain their rebalanced funding profiles. Deposits now account for the bulk of banks' funding structures and exceed their loan books (loan-to-deposit ratio below 80%). We expect this trend to continue, aided by modest credit growth and a limited shift from deposits to off-balancesheet products.

Key assumptions

Economic growth in 2024 will marginally exceed the eurozone average. We expect Portugal's real GDP to expand by 1.8% in 2024. This is lower than the 2.5% we estimate for 2023, but well above the modest 0.9% that we expect for the eurozone, with Portugal's economy supported by NextGenerationEU funds, a resilient labor market, and solid tourism receipts.

The property market correction will be moderate and short-lived. Nominal and real property prices and transactions will continue to decline moderately amid high financing costs, but activity should reactivate toward 2025, partly because of strong foreign demand.

What to look for over the next year

Asset quality trends. Worse-than-anticipated economic growth, unemployment, and high interest rates could hinder banks' efforts to control credit deterioration and weigh on profitability and asset quality. The current environment will also test Portuguese banks' ability to control the cost of customer deposits.

Primary Credit Analyst

Miriam Fernández
Madrid
miriam.fernandez@spglobal.com

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Loan growth

Sector-average growth in loans.

1.5% 2024 forecast

0.0% 2023 estimate

1.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.6% 2 024 forecast

5.0% 2023 estimate

4.5% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2 024 forecast

0.8% 2023 estimate

0.7% 2022 actual

Figures as of fiscal year ending December.

Slovenia | BICRA group: 4

A Small Banking Sector With Substantially Improved Asset Quality

Key takeaways

• Although risks remain elevated owing to the war in Ukraine and subdued growth in Europe, we expect these to be manageable for Slovenia's economy and banking system.

• We think Slovenian banks will maintain good operating profitability, solid capital, and high liquidity buffers, which will help them absorb potential pressure on asset quality.

Banks benefit from higher interest rates, although repricing of deposits will continue to feed through profits; the summer floods in the country could lead to higher credit losses.

Key credit drivers

We expect Slovenia's banking sector to weather a weaker economy. Banks' substantial de-risking efforts in recent years and their success in improving cost efficiency have strengthened the sector's competitive standing. The government in September 2023 announced a windfall tax over a five-year taxation period. We think Slovenian banks are in a good position to absorb the tax burden, although we estimate lower pre-provision income of 15%-20% annually.

The private sector's low indebtedness should limit credit risk. Leverage ratios in Slovenia are lower than in most other European economies, mainly because corporates have strongly deleveraged in recent years. Economic stagnation in selected European countries, high inflation, and increased interest rates will likely exacerbate credit risk and lead to moderate asset quality deterioration in the next 12 months, but we don't expect a material impact.

Key assumptions

We believe economic growth will slow in 2023. We forecast GDP growth at about 1.5% in 2023 and 2.3% in 2024. The country relies heavily on energy-intensive sectors and exports to larger EU countries because it is closely integrated in Western European supply chains. In our base-case scenario, we expect no significant adverse consequences for growth. We believe unemployment will remain low in 2023, at 3.8%.

Sound profitability and resilient balance sheets will continue. We anticipate the banking sector's profitability to remain sound, mainly thanks to the boost of interest income from higher interest rates, which will slowly fade amid higher funding cost. While nonperforming assets and credit losses have stayed low, recent floods in the country could mean higher risk costs.

What to look for over the next year

Repricing of deposits. Banks in Slovenia are mainly funded with customer deposits, of which a large proportion comes from households and consists of overnight deposits. Slovenia has one of the largest gaps between loan and deposit rates in the eurozone. Still, we have seen early indications of a higher pass-through of interest rates to depositors. We expect net interest margins to stabilize over the next 12-24 months, although not materially below current levels.

Real estate price developments. Inflation-adjusted residential real estate prices increased by 2.7% in 2022, a substantial cool-off from 13.7% in 2021. Although we think remaining pressure on house prices is likely to persist in the next year, we do not expect a steep price correction.

Primary Credit Analyst

Cihan Duran
Frankfurt
cihan.duran@spglobal.com

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Loan growth

Sector-average growth in loans.

5.0% 2 024 forecast

0.7% 2023 estimate

10.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.3% 2024 forecast

2.4% 2023 estimate

2.2% 2022 actual

RoAA

Sector-average return on average assets.

1.2% 2 024 forecast

1.1% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Spain | BICRA group: 4

Growth Will Remain Muted, But Enhanced Profits Will Hold Up

Key takeaways

Banks will preserve solid profitability in 2024, even if margins grow far more moderately than in 2023 and lending growth remains subdued.

Some problem loans will emerge, primarily from small and midsize enterprises (SMEs) and unsecured consumer loans, but credit costs will remain contained and be easily absorbed.

• Banks will maintain adequate capitalization and sound funding profiles.

Key credit drivers

Despite decelerating, Spain’s economy will continue outperforming European peers. We forecast Spain’s 2024 real GDP growth at 1.6%, somewhat below the 2.1% likely for 2023, but better than the sluggish 0.9% for the eurozone as a whole.

Higher-for-longer interest rates will support banks’ profitability. Spanish banks’ net interest income growth will be a fraction of 2023's, as the gradual repricing of deposits and migration from demand to time deposits (contained so far) lead to higher funding costs. Lending growth will remain muted, but banks will preserve solid earnings and good efficiency. We forecast the banking system's domestic return on equity at 9%.

Asset quality deterioration will be contained. While there are limited signs of asset quality weakness, some problem loans will likely emerge in 2024, particularly among SMEs and unsecured consumer loans. However, the provisioning cushions created during the pandemic and the sizable share of corporate exposures covered by government guarantees point to limited credit losses (49 basis points of average loans).

Key assumptions

Delays in government formation will not undermine the course of economic developments.

The labor market will remain resilient. We forecast unemployment to remain at 12.1% in 2024.

The European Central Bank will not increase interest rates further. It could yet discuss accelerating quantitative tightening by actively selling bonds, which would lift yields.

What to look for over the next year

Economic and financial developments. Growth could be weaker than forecast due to geopolitical risks or a higher-than-expected impact of high interest rates on the economy, in turn affecting labor performance and our expectations of banks' credit losses, profits, and growth prospects. Financing conditions could also tighten further, challenging Spanish banks’ access to funding at affordable prices, increasing latent losses on securities portfolios or exposing them to higher counterparty credit risks.

The evolution of banks’ pricing, primarily of deposits, but also loans. Containing the pass-through of rate hikes to deposits and competitive pricing pressures on new lending will be key for banks in preserving margins.

Primary Credit Analyst

Elena Iparraguirre
Madrid
elena.iparraguirre@spglobal.com

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Loan growth

Sector-average growth in loans.

1.0% 2024 forecast

-1.0% 2023 estimate

-0.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.5% 2 024 forecast

5.0% 2023 estimate

4.8% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.7% 2023 estimate

0.7% 2022 actual

Figures as of fiscal year ending December.

Sweden | BICRA group: 2

Banks Navigate Choppier Operating Conditions

Key takeaways

• We expect Swedish banks to post strong results in 2023 owing to interest rate increases.

Declining house prices and mortgage transactions have lowered retail banking volumes, but we expect this will likely turn in second-quarter 2024 given that housing availability is below previous levels.

Sweden's private sector continues to reckon with higher funding costs, and any potential asset quality deterioration will remain manageable for banks.

Key credit drivers

Banks have significant exposure to property markets. Lending to residential and commercial real estate accounted for about 45% of banks' total loans as of second-quarter 2023. Asset quality has remained robust despite rising interest and living costs, but mortgage volume growth has slowed in the wake of tighter monetary policy.

Repatriation of property manager funding continues. Banks continue to provide refinancing support for large Swedish property managers, which has partly offset declining growth in residential real estate. This activity has returned after a hiatus of several years, when many large Swedish property managers turned to wholesale funding markets that became trickier in second-half 2022.

Key assumptions

The first lines of defense--earnings and capital--will hold firmly. Banks' net interest income has improved in the past year given the faster-than-anticipated interest rate increases, which has ensured the sector is well capitalized. Cost of risk has remained contained thus far but we expect it to increase; we continue to think Swedish banks can manage this over the next 12-18 months.

Strong labor markets and savings will support spending. We expect unemployment to increase further, from 7.7% as of September 2023, but think this should remain contained over the course of the cycle. We expect the stable labor market should help repayment capacity. Savings buffers established during the pandemic are still available to provide support to households, although we note the consumption contraction has advanced the recession.

What to look for over the next year

Swedish real-estate movements. While we still expect households to ride out the weaker economy, the banking sector's fate will also be determined by the extent of the contraction in consumption, and property management companies' ability to cope with higher interest burdens.

Global growth implications for Swedish corporates. We forecast Sweden's real GDP will contract 0.8% over 2023, due in part to interest rate sensitivity that will weigh on private consumption, and that growth will remain flat in 2024. The country's position as a net exporter (with a forecast current account surplus of about 4% of GDP over the next two-to-three years) means a shift in global demand could affect Swedish growth for 2024.

Primary Credit Analyst

Olivia Grant
Stockholm
olivia.grant@spglobal.com

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Loan growth

Sector-average growth in loans.

2.5% 2 024 forecast

1.8% 2023 estimate

5.5% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.6% 2 024 forecast

0.5% 2023 estimate

0.4% 2022 actual

RoAA

Sector-average return on average assets.

0.6% 2 024 forecast

0.8% 2023 estimate

0.7% 2022 actual

Figures as of fiscal year ending December.

Switzerland | BICRA group: 2

Returns Are Sound Despite Changing Market Conditions

Key takeaways

Apart from Credit Suisse, rising interest rates and sound cost discipline enabled Swiss banks to post their highest profits in a decade, and we forecast minimal domestic credit losses.

Credit Suisse's failure exposed the limitations of systemic regulation and the regulator's supervisory toolkits. We expect parliament to scrutinize the supervisory toolkit of financial regulator Swiss Financial Market Supervisory Authority (FINMA), potentially affecting smaller banks as well.

Swiss households have proven their resilience to external stress scenarios and we expect continuing superior resilience and no material worsening of households' credit strength.

Key credit drivers

Domestic banks' asset quality continues to strengthen. Swiss households have proven their resilience to external stress scenarios. We believe that interest rate-induced risks from mortgage debt and inflation are substantially mitigated by households’ very high net wealth. Despite adverse shocks, corporate insolvencies have not increased, and we consider the sector very flexible and competitive. We therefore forecast minimal domestic credit losses for Swiss banks and expect asset quality will continue to outperform that of peers.

Housing prices move little despite a challenging environment. Due to the more difficult economy and rising interest rates, we don’t expect major price movements for the next two years. In addition, we see interest rate rises to be less pronounced in Switzerland, reflecting lower inflation. We think the strong labor market, tight and inelastic housing supply, and ongoing high demand will support price stability.

Key assumptions

Similar to other European countries, Switzerland's growth is set to slow. We expect Swiss GDP will rise 0.6% in 2023 and 1.2% in 2024 compared with 2.1% in 2022. The slower growth reflects Switzerland's sensitivity to tighter monetary conditions, and supply chain issues from geopolitical tensions. We expect inflation will stay in line with the Swiss National Bank's (SNB's) target of 2%, supporting the private sector's financial health and banks' cost bases.

What to look for over the next year

A larger UBS testing FINMA's ability to supervise systemically important banks. We expect FINMA to enforce the Swiss too-big-to-fail regulation on UBS, creating an equitable approach and mitigating potential moral hazard. Following the merger with Credit Suisse, UBS' balance sheet will likely represent about 200% of Switzerland's GDP. We think the supervision of non-systemically important institutions has been generally effective in the country's two-tier banking system.

Credit Suisse's failure exposing regulatory limitations. Following the parliamentary and expert commission, we think legislative changes could ensue, for example related to capital ordinance, FINMA's early intervention powers, SNB's role as lender of last resort, and resolution rules.

Primary Credit Analyst

Lukas Freund
Frankfurt
lukas.freund@spglobal.com

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Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

2.1% 2023 estimate

3.1% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.6% 2 024 forecast

0.7% 2023 estimate

0.7% 2022 actual

RoAA

Sector-average return on average assets.

0.6% 2 024 forecast

0.5% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

The Netherlands | BICRA group: 3

Solid Fundamentals Help Banks Surmount Economic Challenges

Key takeaways

• We foresee some deterioration in asset quality as the operating environment becomes less supportive, but expect this will be manageable for banks.

While nominal house prices have started to stabilize after a small decrease beginning 2023 and years of rapid increases, we expect real prices to continue decreasing, albeit moderately, in 2024. Household leverage remains among the highest in Europe on a gross basis, but low unemployment and Dutch households' substantial savings and financial assets should mitigate risks related to the rising cost of living.

Dutch banks' fundamentals--healthy capital levels, ample liquidity, digitally advanced business models, and relatively efficient cost bases--should help them to cope with economic challenges.

Key credit drivers

We foresee some deterioration in asset quality metrics as economic and credit growth slows, but expect the pressure to be manageable for banks. Asset quality is structurally supported by fixedrate long-term mortgages representing the largest part of Dutch banks' loan portfolios. We anticipate a marginal increase in nonperforming loans to 2.3%, coming mostly from lending to corporates and small and midsize enterprises. We expect Dutch banks will maintain prudent provisioning and we anticipate credit impairment charges will remain stable at a through-the-cycle level of 25-30 basis points.

Dutch banks are benefiting from rising interest rates so far, since the deposit pass-through rate remains quite low. Net interest income growth so far is largely driven by benefits banks are getting on the liability side. Dutch banks' loan books largely consist of longer-term, fixed-rate mortgages, but there is ample liquidity in the system. Therefore, banks are increasing savings interest rates relatively slowly compared with the market interest rate rise.

Key assumptions

Slow economic growth over the next 18 months. We expect 0.5% GDP growth in the Netherlands in 2023 and 0.9% in 2024. The labor market remains tight and we expect unemployment to stay below 4%. Inflation, after peaking at 11.6% in 2022, will slow to 4.9% in 2023 and further decline in the following years.

What to look for over the next year

Interest rate pass-through into deposit rates. If competition for deposits and/or public pressure for higher deposit rates intensifies, this would substantially limit the extent to which banks can take advantage of rising interest rates.

House market dynamics. Mortgage book asset quality remains good but there could be downside risks if cost-of-living pressure lasts longer and results in an abrupt and significant adjustment in the real estate market.

Primary Credit Analyst

Mathieu Plait
Paris
mathieu.plait@spglobal.com

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Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

3.0% 2023 estimate

4.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.3% 2 024 forecast

2.2% 2023 estimate

2.2% 2022 actual

RoAA

Sector-average return on average assets.

0.5% 2024 forecast

0.5% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

United Kingdom | BICRA group: 3

Banks Are Picking Their Way Along An Uneven Path

Key takeaways

• The U.K.’s economy remains delicately poised, inflation is falling slowly, and growth is weak

Earnings resilience, stable asset quality, and solid funding and capitalization underpin U.K.
banks’ credit profiles.

As the banking system embarks on a long road back to normality, with deposits tapering and rates levelling off, U.K. banks are on a stable footing.

Key credit drivers

U.K. banks face a gloomy economic outlook. The U.K. seems to have avoided a recession this year, but conditions are still depressed. Inflation is cooling slowly, and interest rates are elevated, jointly tempering economic growth that we expect to slow to a trickle as we move into 2024.

Conditions are fragile. Unemployment has remained fairly steady, with excess labor demand unwinding slowly, while rising interest rates have reduced mortgage demand and the debt-servicing capacity of corporates and households. These factors weigh on prospects for economic and credit growth, and risks remain high.

Yet we expect the U.K.'s banking sector to show continued resilience. Our ratings on U.K. banks have been solid in 2023; we have even taken positive rating actions on individual banks. Cautious funding and liquidity management, comfortable regulatory capital, and healthy earnings enable the major players to navigate through the uneven market landscape. This flexibility is central to the stability of our Banking Industry Country Risk Assessment (BICRA) for U.K. banks.

Key assumptions

Strong industry profitability despite receding interest income. Still-high interest rates will keep supporting banks' income in the next 18 months, even if benefits of rate rises on net interest margins drop in the third quarter. Banks' net interest income should thus still be much better this year than in 2022. Combined with cost management and contained impairment, this should keep earnings strong.

Asset quality should gradually return to normal. Despite rising strain on households and corporates, asset quality has been historically strong. Nonetheless, we expect asset quality to show pockets of weakness later this year as high inflation and interest rates pressure the most vulnerable borrowers. Even if nonperforming loans are slow to appear in 2023, we expect banks will keep loan provisions in place, using conservative default assumptions, scenario weightings, and management overlays to capture the host of risks facing U.K. households and corporates.

What to look for over the next year

Conditions will test the stability of the U.K. housing market. We expect the impact of rising interest rates and cost of living strains to spill over to the housing market next year. Rising mortgage costs, tight household budgets, and subdued housing demand could see house prices fall by about 11.6% versus year-end 2022 levels. This is a steeper drop than in many European peer economies, but significantly below the price gains seen from 2019 to 2022.

Primary Credit Analyst

William Edwards
London
william.edwards@spglobal.com

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Loan growth

Sector-average growth in loans.

1.0% 2024 forecast

0.0% 2023 estimate

3.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.0% 2024 forecast

1.8% 2023 estimate

1.6% 2022 actual

RoAA

Sector-average return on average assets.

0.6% 2 024 forecast

0.6% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

Emerging EMEA

Armenia | BICRA group: 8

Strong Economic Growth Supports The Banking Sector

Key takeaways

• We expect Armenia's economy to expand 7.5% in 2023 and 4.5% in 2024.

Banking sector profitability should remain strong, with return on assets staying above 2% in 2024.

• Heightened geopolitical tensions will add to uncertainty over the next couple of years.

Key credit drivers

Robust economic growth is supporting the Armenian banking sector's performance. We expect the country's GDP to expand 7.5% in 2023, with economic growth normalizing to about 4.0% by 2025, supporting new business growth and banking sector profitability. A strong exchange rate has reduced banks' currency-induced credit risk, with loan dollarization levels falling to 34% by Aug. 31, 2023, from 45% at end-2021. We expect this to fall further toward 30% in the next couple of years.

Deposit inflows have materially boosted banks' funding base and profitability. Net money transfers from Russia reached \$2.2 billion over the first eight months of 2023 despite the weaker ruble exchange rate and some weakness in spring months. While Armenia is increasingly acting as a transit point for these funds, rather than the destination, it will likely continue to support banks’ performance into 2024.

Key assumptions

We expect that the Armenian dram will depreciate slightly over the next few years. The positive momentum created by migration and money inflows from Russia will eventually fade. Nevertheless, we expect the Armenian dram (AMD) to depreciate only modestly, reaching AMD420 per U.S. dollar over the next two years. Stability of the dram was further confirmed by only modest volatility in September and October 2023, peaking at AMD430 per dollar despite political events.

The banking system will continue to expand. We expect credit growth to stay above 10% on a currency-adjusted basis, with lending in foreign currency expanding at 4%-5% and considerably faster growth in local currency lending.

Nonresident deposits will be stable. The Armenian banking sector liquidity should remain strong over 2023-2024 as customers have fewer options to place the funds elsewhere. We expect currency conversion revenue to gradually decline as the inflow of money eventually slows.

What to look for over the next year

Geopolitical and security risks. The exodus of Armenians from Nagorno-Karabakh, the complicated relationship with Russia, and increasing pressure from Turkiye and Azerbaijan to open a transit route between the countries will continue to influence the political agenda and the government’s policy direction.

Primary Credit Analyst

Roman Rybalkin
Dubai
roman.rybalkin@spglobal.com

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Loan growth

Sector-average growth in loans.

12.0% 2024 forecast

15.0% 2023 estimate

3.1% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.2% 2 024 forecast

3.1% 2023 estimate

3.0% 2022 actual

RoAA

Sector-average return on average assets.

2.0% 2 024 forecast

3.0% 2023 estimate

3.5% 2022 actual

Figures as of fiscal year ending December.

Azerbaijan | BICRA group: 9

Lending Growth Despite Muted Economic Growth Prospects

Key takeaways

• We expect growth in loans and deposits above 10% over the next 12 months despite Azerbaijan's economic growth forecast for 2023-2024, which is the lowest in the region.

The banking system has a stable funding profile, with a much smaller increase in nonresident deposits than regional peers.

Key credit drivers

Economic growth prospects for Azerbaijan in 2023-2024 are lower than for most regional peers. Pressure on growth prospects relates mainly to a long-term gradual decline in oil output. We forecast no real GDP growth in 2023 and 1.4% growth in 2024. This could curtail growth in the banking sector, although for 2023, we expect above 10% growth in loans and deposits.

The banking system's funding profile has strengthened. We have observed no material outflows of retail and corporate deposits since 2016. We think core customer deposits will fund loans over the next few years, eliminating the need for external funding. Deposit dollarization has progressively declined to regional peer levels but remains significantly higher than loans. Also, volatile nonresident deposits, at 5%, are much lower than at regional peers.

Key assumptions

The positive impact from the inflow of migrants and capital is less pronounced than regional peers. Since Azerbaijan kept its land borders closed from 2020, the country did not experience the large influx of migrants, remittances, and nonresident deposits that has materially benefitted the banking sectors of Georgia, Armenia, Kazakhstan, and Uzbekistan in 2022-2023.

The banking system is recovering following a protracted correction. Favorable commodity price dynamics have stimulated credit demand and resulted in improved asset quality. We expect the system will continue recovering after a strong rebound in lending in 2021-first half 2023.

Regulation is evolving, with weak governance and transparency. The institutional framework in Azerbaijan remains relatively weak, despite some improvement. Many aspects of bank ownership, management, and governance are opaque and lead to high risks. Weak transparency and disclosure standards make it difficult for the regulator to assess banks' real risk profiles.

What to look for over the next year

A moderate deterioration of asset quality. We expect nonperforming loans could increase to 4.0%- 4.5% over the next 24 months from 3.5% at June 30, 2023, as loans season in a low-growth environment, and banks are likely to face additional provisioning needs in 2023. We forecast credit losses in 2023-2024 will remain at 1.0%-1.2% of average loan books.

Stable profitability. We forecast profitability in the next 12 months will remain broadly on par with 2022 levels. New lending growth, with a focus on retail products, normalizing cost of risk, and control over operating expense, will be the pillars for stable profitability.

Primary Credit Analyst

Annette Ess
Frankfurt
annette.ess@spglobal.com

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Loan growth

Sector-average growth in loans.

10.0% 2024 forecast

15.0% 2023 estimate

18.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.5% 2024 forecast

4.0% 2023 estimate

3.8% 2022 actual

RoAA

Sector-average return on average assets.

2.0% 2 024 forecast

2.1% 2023 estimate

2.2% 2022 actual

Figures as of fiscal year ending December.

Bahrain | BICRA group: 7

Steady Profitability Despite Slipping Asset Quality

Key takeaways

• After a post-pandemic spike, we expect economic growth will normalize in 2023-2024.

Despite tighter financial conditions, we believe Bahrain's relatively diverse economic base will contain the deterioration in banks' asset-quality indicators.

• Although its contribution to the overall funding profile is moderate, external debt could prove vulnerable to domestic or regional stresses.

Key credit drivers

Economic growth is set to slow. After real GDP growth spiked at 4.9% in 2022 thanks to strong postpandemic recovery, we forecast it will return to the longer run average of 2.5% over 2023-2026. However, slowing global growth and tighter global financing conditions pose headwinds. Nevertheless, Bahrain's relatively diverse economy benefits from its proximity to the large Saudi Arabian market, adequate regulatory oversight of the financial sector, and a relatively low-cost environment.

External vulnerabilities persist. Tighter monetary conditions put some pressure on funding profiles of retail Bahraini banks, which had accumulated net external debt of 24% of domestic loans as of end-August 2023. Still, funding from other countries in the Gulf Cooperation Council (GCC) stayed strong, despite less abundant liquidity in Saudi Arabia. We expect this stability to continue in the next 12-24 months.

Key assumptions

Loan growth remains slow. We expect mid-single-digit loan growth in 2023-2024, primarily in the retail sector, notably subsidized housing finance. However, high interest rates and slower economic growth will pose headwinds and curb loan demand.

Higher interest rates will have a dual impact. Higher interest rates will support net interest and profit margins. Meanwhile, we expect cost of risk to slightly pick up to 80-90 basis points to cover losses against the new stock of deferred loans transitioning to stage 2 and stage 3, while leveraged borrowers will face higher debt service costs.

The government's capacity to support the banking system is limited. We expect the Bahraini government would have limited capacity to support the banking system in the event of distress, owing to fiscal constraints.

What to look for over the next year

GCC support. We consider that the Central Bank of Bahrain (CBB) has limited ability to maintain the dinar's peg to the U.S. dollar due its low international reserves. Nevertheless, we expect the peg will remain in place over the medium term. The CBB receives daily foreign currency inflows from oil sales through the national oil companies. Inflows from other GCC sovereigns have also supported the country's reserve position and we expect this support will continue, if needed.

Primary Credit Analyst

Roman Rybalkin
Dubai
roman.rybalkin@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

4.0% 2023 estimate

3.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.5% 2 024 forecast

5.0% 2023 estimate

4.2% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

1.1% 2023 estimate

0.9% 2022 actual

Figures as of fiscal year ending December.

Belarus | BICRA group: 10

The Economic And Political Environment Remains Challenging

Key takeaways

• Persisting financial stability and external risks, due to severe macroeconomic stress caused by sanctions on Belarus and its key trading partner Russia, result in continuous strain on the country's economy and banking sector.

Extended political volatility and international sanctions will likely further dent investor confidence, impairing Belarus' moderate growth prospects.

The financial system's stability remains under high and increasing pressure, and the government's already weak ability to provide support in the event of stress is diminishing.

Key credit drivers

Belarus' economic outlook remains fragile amid a protracted internal political crisis. Belarus faces high economic, balance-of-payments, and financial-stability risks related to international sanctions. The full extent of the economic damage is difficult to estimate, but we expect it will be substantial. The tough macroeconomic environment means that already considerable pressure on the banking sector will remain, squeezing banks' earnings, asset quality, funding, and liquidity.

Key assumptions

Economic growth remains constrained. The EU, U.S., and U.K., among others, have imposed substantial sanctions on Belarus in response to its support for Russia's military intervention in Ukraine. The full impact is difficult to gauge, but we expect significant disruption of economic activity and dislocation of established supply chains. Nevertheless, our base-case estimate is that Belarus will likely show positive real GDP growth in 2024, following a contraction of 4.7% in 2022.

The debt-servicing capacity of companies and households will be stretched. The difficult macroeconomic environment, local currency volatility, and potential for a protracted period of geopolitical tension will result in continued pressure on the banking sector. We expect nonperforming assets will increase to 14%-15% and credit costs will rise to 3.5%-4.5% in 2023-2024.

What to look for over the next year

How asset quality might evolve. Challenges resulting from severe macroeconomic stress, including international sanctions, will exacerbate Belarus' banking sector's weak performance of the past two years. The government has limited scope to support the sector's stability, in our view.

Stability of customer deposits. Continued deposit volatility and diminishing investor confidence could destabilize the banking sector, particularly given the extremely limited sources of liquidity support that banks can rely on, especially in foreign currency.

Note: S&P Global Ratings acknowledges a high degree of uncertainty about the extent, outcome, and consequences of the military conflict between Russia and Ukraine. As the situation evolves, we will update our assumptions and estimates accordingly.

Primary Credit Analyst

Anastasia Turdyeva

Dublin anastasia.turdyeva@spglobal.com

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Loan growth

Sector-average growth in loans.

11.0% 2024 forecast

11.0% 2023 estimate

9.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

15.0% 2 024 forecast

15.0% 2023 estimate

13.0% 2022 actual

RoAA

Sector-average return on average assets.

0.5% 2024 forecast

0.5% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Egypt | BICRA group: 10

Banks' Creditworthiness Is Linked To That Of The Sovereign

Key takeaways

• Foreign currency shortage in official channels weighs on bank creditworthiness.

• Banks' exposure to the sovereign remains substantial and heightens the sector's risk.

• Exposure to risky small and midsize enterprises (SMEs) is increasing.

Key credit drivers

Banks have a strong link with the government's creditworthiness. As of June 2023, the sector's gross exposure to the sovereign, through securities and loans, accounted for about 60% of assets. It might increase in the next year because foreign investors might not fully cover Egypt's high financing requirements. Even if these investments support banks' profitability, they heighten the link between banks’ and the sovereign’s creditworthiness.

Banks' reliance on external funding persists. The system's external position deteriorated. Net banking sector external debt reached about \$17.7 billion, or 11% of total loans, as of June 2023. A significant gap between the official exchange rate and parallel market evaluation is supporting opportunistic demand from residents, further stressing banks’ funding profiles. We expect net external debt to gradually decline once divergence between the official and parallel exchange rates narrows.

Banks' asset quality will weaken. High inflation, strong currency depreciation, and slower growth will weigh on borrowers' credit quality, particularly SME borrowers (which reached 25% of the lending book), as part of the Central Bank of Egypt's (CBE) efforts to improve financial inclusion. A significant share of publicly guaranteed lending and natural hedge for customers indebted in foreign currency will cushion the impact, resulting in yearly credit losses of 160-170 basis points in 2024-2025.

Key assumptions

Economic growth will slow. Due to the foreign currency crunch, we expect GDP growth to slow to 3.5% in fiscal 2024. We expect the twin deficit to increase. We estimate the general government deficit to reach 6.8% of GDP and current account deficit to widen to 2.7% of GDP from 1.2% in 2023. We anticipate inflation to gradually decline after peaking at 38% in Sept. 2023. We expect the exchange rate adjustment will eventually result in a devaluation of the Egyptian pound (EGP) to near its level in the parallel market, about EGP40 per U.S. dollar.

What to look for over the next year

Policy measure implementation. Delays to currency and structural reforms can increase the risk that Egyptian authorities might be unable to finance high external debt redemptions or reduce debt sustainability.

Foreign currency liquidity. Reduced-for-longer foreign currency availability in official channels might result in limiting customers’ operations and imposing tighter currency controls.

Primary Credit Analyst

Regina Argenio
Milan
regina.argenio@spglobal.com

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Loan growth

Sector-average growth in loans.

25.0% 2024 forecast

25.0% 2023 estimate

22.8% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.7% 2 024 forecast

3.3% 2023 estimate

3.2% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

1.1% 2023 estimate

1.2% 2022 actual

Figures as of fiscal year ending June.

Georgia | BICRA group: 7

Good GDP Growth Prospects Drive System Expansion

Key takeaways

We think broadly favorable economic settings will support the Georgian banking sector's expansion.

The sector's prudential regulation is broadly consistent with international standards, but recent amendments to the central bank law could undermine the independence of the National Bank of Georgia (NBG).

Key credit drivers

Banks in Georgia face fewer economic risks than regional peers. The Georgian economy is growing at 6% in 2023, supported by continued financial and migration inflows, particularly from Russia, alongside a strong recovery in tourism. However, growth is likely to moderate to an average of 4.3% over the next three years. Still, this means a favorable operating environment for Georgian banks.

Recent amendments to regulations could put the NBG's independence at risk. In June 2023, a new position of a first vice-president was introduced. This person would assume the duties of NBG governor if the latter position becomes vacant, and will hold significant authority over monetary policy decisions. Also, in September, the NBG decided a Georgian court order is required before banks can apply sanctions against Georgian citizens, resulting in three vice presidents resigning. While most Georgian banks have said they will comply with international sanctions, the lack of consensus among key stakeholders could weaken our view of the sector's institutional framework.

The household debt burden is still modest. Despite a rapid debt buildup, household debt service ratios in Georgia compare favorably with those of peers. This reflects a higher-than-average share of mortgages and responsible lending standards promoted by the NBG.

Key assumptions

We foresee moderate real growth in loans and deposits. We expect growth of 5%-10% in the next 12 months, adjusted for exchange rate impact and reflecting falling, but still high, inflation.

Stable asset quality will support profitability normalization. We forecast a nonperforming loan ratio of 4.0%-4.5% and normalized cost of risk of about 1% in the next 12 months. Foreign currency lending will remain the main source of credit risk. We expect margins will be broadly stable, underpinned by high interest rates.

What to look for over the next year

Compliance with international sanctions. In September, the NBG changed the procedure for implementing international sanctions, now requiring a decision of Georgian court before applying any to Georgian citizens. We will monitor how this will influence banks' compliance with sanctions.

Volatility of nonresident deposits. We estimate that, since the start of Russia-Ukraine war, about Georgian lari 3 billion in nonresident deposits, predominantly from Russian residents, have entered the banking system, improving the historical loan-to-deposit ratio. These deposits will likely be stable while the war continues.

Primary Credit Analyst

Annette Ess
Frankfurt
annette.ess@spglobal.com

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Loan growth

Sector-average growth in loans.

8.0% 2024 forecast

10.0% 2023 estimate

4.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.5% 2024 forecast

4.0% 2023 estimate

4.0% 2022 actual

RoAA

Sector-average return on average assets.

3.5%% 2024 forecast

3.5% 2023 estimate

3.8% 2022 actual

Figures as of fiscal year ending December.

Jordan | BICRA group: 8

Resilient For Now

Key takeaways

• Inflation and tighter financing conditions will lower demand for loans and borrowers’ creditworthiness, leading to slight asset quality deterioration in 2023-2024.

Limited imbalances in the system and supporting measures to creditors will keep the deterioration contained.

• We foresee limited prospects for profitability growth as banks' funding competition intensifies.

Key credit drivers

We expect Jordan's GDP to expand in 2023-2024. External demand, fertilizer projects, and eventual monetary easing will contribute to this growth. Past reforms and an improved economic outlook in neighboring Gulf Cooperation Council (GCC) countries should also benefit Jordan. The regional geopolitical environment is a source of downside risk.

Lending activity will decelerate as monetary policy tightens. The Central Bank of Jordan (CBJ) increased its main policy rate by a cumulative 500 basis points (bps) from March 2022 to July 2023. Therefore, we expect loan growth will decelerate to an average of 4% in 2023-2024 from 6.3% over 2020-2022, and private sector leverage will stabilize at about 86% of GDP.

Key assumptions

Asset quality deterioration should be manageable. While recent central bank data suggest that deterioration has not happened in first-half 2023, we think banks will face asset quality pressures over the next few quarters because CBJ is gradually scaling back its subsidized lending schemes and rising rates erode borrowers’ creditworthiness. We therefore expect the nonperforming loan ratio to increase slightly, while credit losses should rise to about 110 bps in 2023 and 90 bps in 2024 from 82 bps in 2022.

Profitability will improve moderately. Jordanian banks' profitability has fully recovered from the pandemic, reaching 9.5% return on equity in 2022. Margin gains from asset repricing will be partly offset by decelerating loan growth and rising credit costs, ultimately resulting in a slight increase in profitability.

What to look for over the next year

Intensifying competition among banks. A higher cost of funding, which rate hikes imply, will increase already-tough competition between banks and funding pressure, and constrain profitability gains, especially for the smallest banks. Digitalization could help banks differentiate.

Jordan's economic vulnerability to external risks. Regional geopolitical risks, higher-for-longerrates, or lower-than-expected economic growth in the GCC could disrupt Jordan's economy.

Primary Credit Analyst

Anais Ozyavuz

Paris anais.ozyavuv@spglobal.com

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Loan growth

Sector-average growth in loans.

5.0% 2 024 forecast

3.0% 2023 estimate

8.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.0% 2024 forecast

5.1% 2023 estimate

4.8% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

1.2% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Kazakhstan | BICRA group: 8

Geopolitical Volatility Could Upset The Banking Sector

Key takeaways

Economic growth will slow as the government implements new fiscal rules. From 2024, the government plans to cap spending growth and reduce transfers from the National Fund of the Republic of Kazakhstan to the budget. Event risks around the Caspian Pipeline Consortium (CPC) remain prominent amid the Russia-Ukraine conflict.

We consider banks' credit risk to be under control for now, but banks are vulnerable to potential shocks, as economic fundamentals will not support asset quality if the pace of retail lending growth does not slow significantly.

Key credit drivers

Rapid growth of retail loan books could add to the pockets of risk. Retail lending is likely to expand by about 20%-23% in nominal terms in 2023 and then expected to slow to 17%-19% in 2024 (from 30% in 2022 and 41% in 2021). A slowdown of growth in unsecured consumer loans would benefit banks, as rapidly increasing indebtedness among those on lower incomes could increase banks' credit costs during the downturn of the credit cycle. Although overall household debt to GDP is moderate in a global context, at about 13%, we think that low GDP per capita of about \$13,000, uneven wealth distribution, and rising indebtedness among lower-income households might increase risks for the banking sector.

Potential downside risks to our base case. An increase in geopolitical risks or weaker-thanexpected regional economic growth could impede the sustainability of improvements in credit risk and dampen the risk appetite of banks in Kazakhstan.

Key assumptions

Economic performance will be slow, geopolitical risks remain high. We forecast average GDP growth in Kazakhstan of about 4.4% in 2023-2024 after 3.3% in 2022. Event risks around the CPC pipeline remain. About 80% of the country's oil flows through the CPC pipeline in Russia and onward into Europe.

Banks will continue to generate solid earnings. Banks in Kazakhstan enjoy higher commission income than peers in other countries, which helps boost their profitability. Kazakh banks demonstrated generally stable return on equity at 25%, on average, over 2018-2022. We expect this metric will also be relatively stable in 2023-2024.

What to look for over the next year

Banks' ability to continue reducing nonperforming loans (NPLs). We expect systemwide NPLs-- defined as stage 3 under International Financial Reporting Standards--to reach about 8.5%-9.0% of total loans in 2023-2024, versus about 18% in 2020. We forecast credit costs for Kazakh banks of about 1.3%-1.5% in 2023-2024.

Primary Credit Analyst

Sergey Voronenko
Dubai
sergey.voronenko@spglobal.com

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Loan growth

Sector-average growth in loans.

13.0% 2024 forecast

15.0% 2023 estimate

20.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

8.5% 2 024 forecast

9.0% 2023 estimate

9.2% 2022 actual

RoAA

Sector-average return on average assets.

3.3% 2024 forecast

3.5% 2023 estimate

3.7% 2022 actual

Figures as of fiscal year ending December.

Kuwait | BICRA group: 4

Asset Quality To Weaken Slightly

Key takeaways

Economic growth is likely to slow because of lower oil production and weaker non-oil act

• We expect that subdued demand in the real estate sector and exposure to riskier geographies will generate new nonperforming loans (NPLs) for Kuwaiti banks.

• The sector's funding profile is supported by a strong local deposit base.

Key credit drivers

We expect Kuwait's economic growth will slow. After expanding by 8% in 2022, we forecast average growth of 2.3% over 2023-2026 amid OPEC+ oil production restrictions and lower oil prices than 2022. We assume a Brent oil price of \$85 per barrel (/bbl) in 2023-2026, compared with \$101/bbl in 2022.

Banks' asset quality will likely weaken. Rising borrowing costs and a weaker rental market has weighed on the investment property market (primarily rental homes for expats). The commercial real estate sector also continues to suffer from lackluster demand and excess supply. Furthermore, some Kuwaiti banks are exposed to riskier countries, such as Turkiye and Egypt. Overall, we expect these to lead to some new NPLs for banks. We forecast cost of risk will increase and normalize at about 60 basis points (bps)-70 bps in 2024, from 36 bps in first-half 2023. However, given their strong provision buffers, banks are likely to use write-offs to limit the increase in the NPL ratio.

Key assumptions

A comfortable funding and liquidity position. We expect the sector's funding profile to continue to benefit from a strong local deposit base and a net external asset position. Concentration, particularly on deposits from government-related entities, is a source of risk, but mitigated by the stability of these deposits.

The government is willing and able to provide financial support. We expect Kuwait's institutional and administrative framework would allow for a timely and coordinated response to a systemic financial problem. We also believe that the government has sufficient resources to support the financial system in case of need.

What to look for over the next year

Lending growth to remain subdued. Banks' lending books expanded by an annualized 3% in the first half of 2023, well below the 8% growth in 2022. We expect higher interest rates will lead to lower demand from corporate and retail borrowers, which will translate into low single-digit loan growth for the banking sector in 2024. In addition, recurrent political deadlocks could delay the implementation of government-sponsored projects and reduce opportunities for the corporate sector.

Banks will continue to display good profitability. Kuwait's banking sector is well positioned to benefit from the higher-for-longer interest rate environment. Migration of deposits to remunerated instruments and higher cost of risk will reduce the positive impact to some extent.

Primary Credit Analyst

Puneet Tuli
Dubai
puneet.tuli@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

3.5% 2023 estimate

7.8% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.0% 2024 forecast

1.9% 2023 estimate

1.4% 2022 actual

RoAA

Sector-average return on average assets.

1.7% 2024 forecast

1.8% 2023 estimate

1.4% 2022 actual

Figures as of fiscal year ending December.

Morocco | BICRA group: 7

Higher Rates Weigh Down On Credit Growth And Interest Margins

Key takeaways

• We forecast that Morocco's GDP will rise by 3.1% in 2023, then 3.4% a year until 2026, bolstered by a rebound in agricultural output, tourism revenue, and exports.

A high share of fixed-rated long-term loans and muted demand for credit limit the benefits of higher rates for Moroccan banks.

• A significant presence in Africa and increased political and economic instability are weighing on the credit profiles of the largest banking groups in Morocco.

Key credit drivers

Muted credit growth due to higher rates and subdued economic growth. We expect loan growth of 3%-4% until end-2024 as higher rates reduce household loan demand and protracted low economic growth limits corporate lending expansion.

Profitability is improving thanks to better operational efficiency and resilient trading gains. We expect the return on average assets to stabilize at pre-pandemic levels as the positive impact of higher rates is tempered by the significant fixed-rate loans. Better-than-anticipated trading gains supported bottom-line growth in first-half 2023, although whether this will continue is unclear.

Inflation is falling, and the dirham is not under pressure against hard currencies. While real property prices are decreasing, we think credit losses from real estate exposure will be limited because banks’ exposure to developers has fallen considerably recently.

Key assumptions

The economy will be cyclical. We believe Morocco's economy is still skewed toward cyclical sectors, particularly agriculture and tourism. We expect economic growth to average 3.4% over 2024-2026, while headline inflation will decelerate gradually to 4.5% in 2023 and 2.0% by 2026.

Nonperforming loans (NPLs) are gradually increasing. A weak payment culture and the lack of a secondary bad-loan market or a government-led solution for these loans are preventing banks from a speedier balance-sheet cleanup. We expect the NPL ratio to reach 9.8% by year-end 2024, comparable with the peak during the pandemic. We anticipate cost of risk from domestic exposure to average 70 basis points (bps) in the next few years, versus the pandemic peak of 130 bps in 2020.

What to look for over the next year

The largest banks' exposure to Africa is a source of risk. In recent decades, large Moroccan banks have expanded rapidly into sub-Saharan Africa. While the credit risks from lending remain under control, the deteriorating political and economic environment for some of these sovereigns are forcing banks to allocate additional provisions.

Primary Credit Analyst

Goksenin Karagoz

Paris goksenin.karagoz@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

4.0% 2023 estimate

7.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

9.8% 2024 forecast

9.3% 2023 estimate

8.9% 2022 actual

RoAA

Sector-average return on average assets.

0.9% 2024 forecast

0.9% 2023 estimate

0.9% 2022 actual

Figures as of fiscal year ending December.

Nigeria | BICRA group: 10

Profitability To Offset Pressure On Capital Amid Naira Depreciation

Key takeaways

Banks’ strong earnings will compensate for the impact of currency movements on their inflated risk-weighted assets.

• High inflation, interest rates, and tight U.S. dollar supply will keep exacerbating credit risks.

• Despite double-digit lending growth, leverage in the economy will remain low.

Key credit drivers

The weaker naira means stronger earnings, supporting regulatory capital. We expect the banking sector's return on equity (ROE) to reach 30% in 2023, exceeding the 16% average in 2022. Despite elevated cash reserve requirements, high interest rates and low funding costs should support net interest margins. The naira depreciation will likely aid banks’ regulatory capital as stronger earnings from revaluation trading gains offset higher risk-weighted assets. Yet costs will stay high because of the Asset Management Corp. of Nigeria's levy, which accounts for 20% of banks' operating costs, salary adjustments, and foreign currency expenditure related to IT infrastructure.

U.S. dollar shortages persist, exacerbating credit risks. The naira's de-pegging in June 2023 led to its depreciation. Banks' balance sheets are long on U.S. dollars, but borrowers are still struggling to source U.S. dollars and continue to rely on the parallel market. The spread between the two markets has widened in recent months. We expect a higher cost of risk averaging 3.5% in 2023, reflecting the currency movement's statistical effect on banks’ loan coverage. But the sectorwide NPA ratio will be below the 5% regulatory limit because of the impact of the naira's depreciation on gross loans.

Material foreign currency exposure from the oil and gas sector, trade finance, and currency movements could rise. This is due to the proposed removal of oil subsidies and expected rise in domestic refining capacity. We expect foreign currency exposure to average 55% of total loans.

Key assumptions

Currency depreciation to underpin double-digit nominal lending growth. Yet real lending expansion is curbed by high inflation and the weaker naira. The Central Bank of Nigeria's (CBN’s) discretionary cash debits have also hindered lending, and U.S. dollar scarcity is curbing lending to manufacturers.

Asset quality pressure will reemerge. High inflation and interest rates amid the weak naira will strain borrowers’ solvency. Banks will likely use their higher earnings to boost loan loss provisions.

Profitability to stay resilient. We expect the ROE will normalize in 2024 to about 20% thanks to the banks’ robust performance, supported by further naira depreciation and robust net interest margins.

What to look for over the next year

Slower adoption of global standards. Nigerian banks were expected to adopt Basel III standards following a six-month trial period that started in November 2021. However, the CBN has delayed implementation of the new rules. Once in effect, all banks will be subject to additional capital buffer requirements.

Primary Credit Analyst

Samira Mensah
Johannesburg
samira.mensah@spglobal.com

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Loan growth

Sector-average growth in loans.

15.5% 2 024 forecast

52.5% 2023 estimate

20.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.5% 2024 forecast

4.8% 2023 estimate

5.1% 2022 actual

RoAA

Sector-average return on average assets.

2.0% 2 024 forecast

2.2% 2023 estimate

1.7% 2022 actual

Figures as of fiscal year ending December.

Oman | BICRA group: 7

Firmer Economic Fundamentals

Key takeaways

• We expect favorable oil sector dynamics, coupled with higher nonhydrocarbon-sector output to sustain real economic growth in Oman for 2023-2026.

High hydrocarbon prices should continue to support fiscal surpluses and the government's balance-sheet deleveraging.

• Higher oil prices have supported the recovery of key sectors.

Key credit drivers

We expect OPEC+ related oil production cuts to slow economic growth to about 1% in 2023. Oman is a voluntary adherent to the OPEC+ agreement. We expect hydrocarbon sector output to be broadly flat, with the decline in oil production mitigated by an increase in condensate and gas production. We also forecast the nonhydrocarbon economy to grow about 2%. A likely increase in hydrocarbon production should spur growth in 2024 and 2025.

Key assumptions

We see stronger economic resilience for Oman's banking system. Favorable oil sector dynamics and higher non-hydrocarbon sector output will likely sustain Oman's real economic growth over 2023-2026, supporting domestic demand and the performance of key sectors such as tourism, transportation (mainly shipping), and utilities. Structural reforms such as reorganizing Oman's government-related entities (GREs) have brought operational efficiencies and strengthened the entities' financial profiles, which is overall positive for banks.

We expect a further recovery in key sectors previously under stress. Higher oil prices and the post-COVID-19 recovery in the non-oil sector has supported domestic demand and consequently the performance of key sectors, such as tourism, transportation (largely shipping), and utilities. This should lead to lower credit losses than in the past couple of years. However, we expect the systemwide nonperforming loan (NPL) ratio to peak at year-end 2023 at 4.6% (compared with 4.4% at year-end 2022) before starting to decline. We expect structural weaknesses, such as the banking system's high concentration in GREs and the real estate sector, and the overall economy's large dependence on oil, will remain.

Banks rely heavily on public-sector deposits. Omani banks are funded by domestic customer deposits, one-third of which come from the government and GREs. Their recourse to external funding is limited.

What to look for over the next year

Profitability will continue improving. We expect net profit growth of 15% in 2023, mainly supported by higher margins, accelerated credit growth, and lower cost of risk. Coverage of NPLs by provisions stood at 114% of the system level at June 30, 2023.

Primary Credit Analyst

Zeina Nasreddine
Dubai
zeina.nasreddine@spglobal.com

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Loan growth

Sector-average growth in loans.

6.0% 2024 forecast

6.0% 2023 estimate

4.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.8% 2 024 forecast

4.2% 2023 estimate

4.1% 2022 actual

RoAA

Sector-average return on average assets.

1.4% 2 024 forecast

1.3% 2023 estimate

1.2% 2022 actual

Figures as of fiscal year ending December.

Qatar | BICRA group: 5

Cyclically Low Growth, And External Vulnerabilities Persist

Key takeaways

Our private-sector credit growth expectations are at cyclically low levels following a period of substantial expansion with the completion of major infrastructure projects.

• We now expect a much slower reduction in external liabilities--while credit growth is slower, domestic deposit funding has fallen over the year to Aug. 31, 2023.

• The Qatari government will maintain a highly supportive stance toward the banking sector.

Key credit drivers

Public expenditure and hydrocarbon prices. High hydrocarbon prices should support confidence but reduced public-sector infrastructure spending is visible in marginal private-sector growth in 2023 through August. The government's plan to reduce its debt ratios implies a reduction of high-quality public sector assets, all else equal, although slower growth should limit additional buildup of riskier exposures. Nevertheless, credit to the real estate sector has expanded faster than most other sectors, despite continued weak prices.

Stagnating improvement in external funding vulnerabilities. The pace of external liability reduction has slowed more than we expected, leaving the system with a still-sizable net external debt position equivalent to one-third of domestic credit. While credit has also slowed, private and public deposits have declined by a combined 7% to Aug. 31 despite high hydrocarbon prices. Weak deposit formation and the government's plan to reduce its debt burden could prompt further increases in foreign interbank liabilities, especially if demand increases, potentially through a new investment cycle or related to large liquefied natural gas (LNG) developments. At \$60 billion, foreign interbank liabilities now constitute the largest portion of foreign liabilities and have increased by about half the amount that nonresident deposits fell by since end-2021.

Key assumptions

Slower GDP growth and lower government expenditure. We expect slower real GDP growth (about 2.3% in 2023 and 2.5% in 2024) and static government expenditure to contain credit demand. However, long-term LNG developments provide significant growth potential.

Slightly weaker asset quality in 2023-2024. While contained, we expect higher rates and slower growth to contribute to higher nonperforming loan formation, particularly from segments of the real estate sector and from subsidiaries in Turkiye and Egypt.

What to look for over the next year

Changing funding dynamics. Continued increases in foreign interbank liabilities and weak domestic deposit performance could imply higher liquidity risk for banks and strain profitability.

Significant growth in weaker sectors. Further growth in real estate could hamper banks' asset quality, considering ongoing price weaknesses and low commercial occupancy levels.

Primary Credit Analyst

Benjamin Young
Dubai
benjamin.young@spglobal.com

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Loan growth

Sector-average growth in loans.

3.0% 2024 forecast

2.0% 2023 estimate

7.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.1% 2 024 forecast

3.9% 2023 estimate

3.4% 2022 actual

RoAA

Sector-average return on average assets.

2024 forecast

1.4% 2023 estimate

1.3% 2022 actual

Figures as of fiscal year ending December.

Saudi Arabia | BICRA group: 4

Non-Oil Growth And Credit Growth In Saudi Arabia Remain Robust

Key takeaways

• Positive reform momentum will likely drive non-oil sector growth.

• We expect slower mortgage lending growth and a shift toward corporate lending.

• Rising interest rates and tight liquidity will stabilize or slightly improve margins.

Key credit drivers

We expect credit growth will taper off slightly, to 8%-10% over 2023-2025 from 14% in 2022. Higher interest rates, fewer mortgage lending opportunities, and tighter local and global liquidity conditions explain our expectations. We also expect corporate lending to be a chief contributor to loan growth as the Vision 2030 projects are implemented.

Economic growth will moderate in 2023 owing to an OPEC+ related contraction in Saudi oil production, but will then rebound, averaging 2.6% over 2023-2026. We view the process of institutional and structural reforms to reduce reliance on the hydrocarbon sector as a work in progress, although the pace is accelerating.

Key assumptions

Saudi banks' earnings growth will slow in 2023, primarily due to lower credit growth and higher impairment charges. We expect higher interest rates to soften total lending growth to a still solid 10% in 2023, from 14% in 2022. However, due to tight liquidity and deposit migration to remunerated instruments, we expect margins to stabilize or slightly improve. Coupled with higher impairment charges compared with the lows of 2022, we expect earnings growth to slow in 2023.

Asset quality metrics will remain strong. Stage 2 loans accounted for 5.2% of total loans at year-end 2022, while stage 3 loans contributed 1.9%. We expect the stage 3 ratio will increase marginally to 2.1% in 2023, which is better than the average Gulf Cooperative Council (GCC) ratio.

What to look for over the next year

Funding risk will be one of the main challenges for the Saudi banking sector. The government continued to inject deposits into the system to help banks finance their growth. If the government or its related entities start to withdraw deposits from the banking system, stress on the system's liquidity and curtailment of lending growth could follow. Saudi banks are tapping external funding sources which might result in some vulnerability if the expansion is rapid. For the time being, they are still in a net external asset position, although it is declining.

Primary Credit Analyst

Zeina Nasreddine

Dubai zeina.nasreddine@spglobal.com

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Loan growth

Sector-average growth in loans.

9.0% 2 024 forecast

10.0% 2023 estimate

14.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.2% 2024 forecast

2.1% 2023 estimate

1.9% 2022 actual

RoAA

Sector-average return on average assets.

2.3% 2 024 forecast

2.2% 2023 estimate

2.1% 2022 actual

Figures as of fiscal year ending December.

South Africa | BICRA group: 6

Banks Have Adapted To The Tough Operating Environment

Key takeaways

Credit conditions will remain tight amid high inflation, hindering household disposable

• We expect credit losses to rise above historical trends in 2023-2024.

• The banking sector's profitability will remain resilient on the back of higher net interest margins.

Key credit drivers

Loan growth will likely remain muted. We expect credit growth to slow to about 5% in 2023 from 8% in 2022. The South African Reserve Bank’s (SARB's) repo rate reached 8.25% in May this year, up from 6.25% before the pandemic. Difficult economic conditions will hit households and small and midsize enterprises (SMEs) the most.

Credit losses will increase. We expect impairments will climb to 1.2%-1.5% in 2023-2024 from the historical average of 0.8%. Households and SMEs will likely face pressure, leading to higher loss ratios on personal loans, vehicle asset financing, and mortgage loans. We expect nonperforming assets (NPAs) to rise to 4.8% in 2023 compared to 4.2% in 2022.

Financial performance will improve. We anticipate the banking sector will maintain an adequate risk-adjusted return of 16% on average in 2023, supported by banks’ diversified business model, their ability to generate a consistent share of non-interest income, and high interest rates. We expect banks to remain well capitalized and start building additional loss absorbing capacity (ALAC) in 2024. Top-tier banks hold an average of 400 basis points of excess capital above their minimum common equity tier 1 ratio.

Key assumptions

Sharp economic slowdown. Infrastructure decay and lack of investment in the power sector translate into weak GDP growth, which we forecast at 0.8% in 2023. Supply constraints led the SARB to tighten monetary policy in 2022-2023. However, we expect the SARB to start normalizing its key policy rate only late 2024 because of still-elevated food prices and supply constraints. We anticipate that credit growth will remain muted over the next two years, averaging 5%.

Portfolio flows could be volatile. The South African rand continued to depreciate despite monetary policy tightening. Foreign holdings of local currency sovereign debt hover at about 25% after a high of about 40% in 2017. A prolonged stay on the Financial Action Task Force’s grey list could exacerbate investors' negative sentiment.

What to look for over the next year

Regulatory actions. The resolution framework became effective in South Africa in June 2023 with the SARB as the sole resolution authority. The deposit insurance scheme is scheduled to be operational from April 2024. Details on the calibration of ALAC instruments issued by domestic systemically important banks are expected to be clarified before year-end 2023.

Primary Credit Analyst

Samira Mensah
Johannesburg
samira.mensah@spglobal.com

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Loan growth

Sector-average growth in loans.

5.0% 2 024 forecast

5.0% 2023 estimate

8.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.3% 2 024 forecast

4.8% 2023 estimate

4.2% 2022 actual

RoAA

Sector-average return on average assets.

1.5% 2 024 forecast

1.5% 2023 estimate

1.5% 2022 actual

Figures as of fiscal year ending December.

Tunisia | BICRA group: 10

Waiting For Support To Avoid Default

Key takeaways

The pandemic and higher inflation have exacerbated fiscal and external imbalances, and Tunisia is likely to struggle to face external commercial debt repayments absent additional external funding, making a sovereign default possible within the next year.

There is no visibility on whether the country is still negotiating with the IMF; external financing needs remain significant and only partially covered by remittances and tourism revenue.

This difficult economic backdrop will likely continue to erode Tunisian banks' asset quality and profitability, straining their already-weak capitalization.

Key credit drivers

A decade of instability and low growth has weakened banks' operating environment. Reform implementation remains limited amid a muted economic recovery and a fragmented political and social landscape. Tunisian banks will continue to operate in a hostile environment while their financial and risk profiles are already weak.

Tunisian banks' profitability are under pressure. We anticipate profitability will remain below historical levels amid a highly competitive and fragmented operating environment, weak economic prospects, increase in tax expense, and elevated credit losses.

Key assumptions

A hostile operating environment. We forecast real GDP growth for 2023 of less than 0.8%. We expect real GDP to return to 2019 levels only in 2024 because tightening monetary policy, the economic slowdown in Europe, and shaky private sector confidence will hit growth in 2023.

Low demand and deteriorating asset quality due to high rates. Tunisian lenders are only gradually benefiting from rising interest rates, owing to higher funding costs. We expect muted growth for banks' loan portfolios due to the low economic growth and high rates as well as the cautious policy toward small and midsize enterprises (SMEs). We forecast deterioration of the banking system's risk profile, with nonperforming loans (NPLs) reaching 18.2% of total loans by year-end 2024. Loan-loss provisions should remain elevated, averaging 120-140 basis points.

What to look for over the next year

Visibility on IMF negotiations. Mobilizing external funding through an IMF program is important in stabilizing the Tunisian economy and opening the door for additional financial support. Agreeing on reforms and sticking to the implementation agenda are the main milestones we will look for in 2024.

Adoption of International Financial Reporting Standards (IFRS). The banking system is transitioning toward IFRS and Basel III compliance. IFRS' capital impact adoption is uncertain and additional provisioning could further jeopardize some banks' capitalization.

Primary Credit Analyst

Mehdi El Mrabet

Paris mehdi.el-mrabet@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

4.0% 2023 estimate

7.1% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

18.2% 2 024 forecast

17.0% 2023 estimate

16.2% 2022 actual

RoAA

Sector-average return on average assets.

0.9% 2024 forecast

0.9% 2023 estimate

0.8% 2022 actual

Figures as of fiscal year ending December.

Turkiye | BICRA group: 9

The Governing Team Is Unwinding Imbalances, But Risks Stay High

Key takeaways

• Normalizing policies should help rebalancing the economy in the next couple of years.

For now, banks will suffer from the economic adjustment through higher nonperforming loans (NPLs) and cost of risk.

Policy consistency will remain crucial for financial stability.

Key credit drivers

Refinancing risks are decreasing. The new governing team is implementing more orthodox policies, resulting in a positive reaction from the market and increasing external debt rollover rate for banks. We expect banks to refinance most of the \$91.8 billion of short-term debt as of Aug. 31, 2023. While the foreign currency (FC) liquidity (estimated at \$124 billion as of August) appears sufficient to manage any unexpected reduction in rollover rates, the FC reserves with the central bank might not be fully accessible. Moves to unwind the foreign-exchange-protected deposit scheme (23.2% of deposits as mid-October 2023) and increase the attractiveness of the Turkish lira deposits could gradually reverse the financial sector dollarization.

Asset quality is deteriorating. Slowing economic activity, tighter financing conditions, and a sharply depreciating lira are likely to erode borrowers' creditworthiness. We expect banks' credit losses to increase to about 3.5% in 2024 from 3.2% in 2022. Real estate prices will also adjust gradually as negative real interest rates and a high share of self-financed operations will continue to moderately support the market.

Key assumptions

Operating conditions will remain tough. We expect Turkiye’s economy to slow notably, with GDP growth decelerating to 3.5% in 2023 and 2.3% in 2024. The consumer price index (CPI) should decrease from its peak of 72% in 2022 but will remain elevated, averaging 53% and 48% in 2023 and 2024, respectively. We also forecast sharp currency depreciation, with an exchange rate of 40 lira per U.S. dollar by 2024.

Profitability and capitalization will decline. Rising funding costs, lower contributions from CPIlinked securities, and higher credit losses will weigh on Turkish banks' profitability. This, together with lira depreciation, will hurt capitalization, particularly for public banks, which operate with already-low solvency ratios. We do not rule out another round of recapitalization.

What to look for over the next year

The policy shift's durability. Any reversal of policy could be detrimental to the economy, eroding investors' sentiment and residents' confidence in the system.

The weak level of FC reserves. The central bank's net FC reserves were about \$22 billion as of September 2023. We think those reserves are further encumbered by the likelihood that a portion of the \$113 billion in foreign-exchange-protected deposits maturing each month will migrate into FC deposits, requiring dollar sales by the central bank.

Primary Credit Analyst

Anais Ozyavuz

Paris anais.ozyavuz@spglobal.com

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Loan growth

Sector-average growth in loans.

36.0% 2024 forecast

52.0% 2023 estimate

54.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.8% 2024 forecast

2.0% 2023 estimate

2.0% 2022 actual

RoAA

Sector-average return on average assets.

2.0% 2 024 forecast

3.0% 2023 estimate

3.6% 2022 actual

Figures as of fiscal year ending December.

Ukraine | BICRA group: 10

Regulatory Support Is Crucial For Banking Sector Stability

Key takeaways

• Economic conditions in 2023 are slightly more supportive for Ukrainian banks than in 2022.

• The National Bank of Ukraine (NBU) will continue supporting banking system liquidity and tolerating regulatory forbearance to enable banks to operate during the war.

Key credit drivers

The war's duration and effects are difficult to estimate. We expect a prolonged period of economic instability, largely due to the Russia-Ukraine war, which will have a strong negative effect on the economy and banking sector.

Asset quality deterioration will affect banks' capitalization. The NBU encourages banks to proactively provision problem loans and cautiously applies corrective measures to banks for not meeting the capital and liquidity requirements while martial law is in effect. We forecast stage 2 and 3 loans under IFRS could increase to 70% of total loans and cost of risk will increase to 10% in 2023. In first-half 2023, NPLs (90 days or more overdue) increased to 39% (from 30% at year-end 2021 and 38% at year-end 2022).

Key assumptions

The banking system will likely remain resilient on improved economic conditions, despite the war. Expected GDP growth of 3.9%, reduced inflation, a decrease in a key policy rate to 16% in late October 2023, and expected further easing of currency controls support the resilience of Ukrainian banks amid a tough environment. We expect the sector's structure to remain stable.

Government support programs will be a strong factor for lending growth. Growth in consumer loans and residential mortgages through "eOselia" will be driving retail growth.

What to look for over the next year

The results of the NBU’s resilience assessment for the top 20 banks. In 2024, banks with insufficient capital will need to develop plans for capital recovery. The NBU will prioritize introducing new capital adequacy requirements and implementing deferred measures. In the meantime, restrictions on banks' distribution of capital will remain.

Diverging profitability among banks. PrivatBank accounts for about half of the banking system's profit. Provisioning expense and the performance of government securities will determine profitability in 2023. Profitability will remain subdued and operating expense high due to high risks.

Deposit stability. We expect deposits to remain stable, supported by payments to military and government employees. Customer deposits increased 23% in 2022, to a large extent reflecting currency revaluation, and 12% in first-half 2023.

Primary Credit Analyst

Annette Ess
Frankfurt
annette.ess@spglobal.com

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Loan growth

Sector-average growth in loans.

10.0% 2024 forecast

-4.0% 2023 estimate

-1.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

45.0% 2024 forecast

43.0% 2023 estimate

38.02022 actual

RoAA

Sector-average return on average assets.

4.0% 2 024 forecast

3.0% 2023 estimate

1.2% 2022 actual

Figures as of fiscal year ending December.

United Arab Emirates | BICRA group: 5

Higher Interest Rates Will Support Profitability

Key takeaways

• Strong lending growth momentum will continue in 2024.

• We think deterioration of banks' asset-quality indicators will be marginal and banks' profitability will continue to improve on the back of higher interest rates.

• Structural weaknesses persist, including single-name and sector concentrations.

Key credit drivers

Profitability is improving. We expect higher interest rates will continue supporting UAE banks' profitability, although the effect may be diluted by some deposit migration to remunerated instruments. The non-oil sector's recovery has led to higher lending growth in 2023, which we expect will continue through 2024.

Asset-quality deterioration to remain contained. We anticipate that stage 3 loans will stabilize at about 5%-6% compared with 5.2% as of June 30, 2023. The construction and trade sectors, along with small and midsize enterprises, will suffer the most from higher interest rates, in our view. The good performance of other non-oil sectors and banks' precautionary provisioning in recent years will help maintain cost of risk at about 80-90 basis points (bps) in 2024, versus 100 bps in 2022.

Key assumptions

The banking sector is exposed to structural weaknesses. The sector has significant exposure to cyclical industries, including trade, hospitality, and oil--together contributing close to 50% of the UAE's real GDP--which could pose a risk to the economy and banking sector. In addition, single-name concentration, including on some of the weaker government-related entities, persists.

We expect the government will continue supporting the banking system. Because the banking system is regulated and supervised at the federal level, we anticipate that any extraordinary support would come from the federal authorities, directly or indirectly.

What to look for over the next year

The real estate sector is still riding high. Since the end of 2020, we have seen a strong rebound in demand for residential real estate in Dubai, translating into lower risks for banks. However, when the real estate cycle turns, we expect slower cash collection, higher funding needs given the large pipeline of new projects, as well as higher funding costs, all of which will put pressure on developers and reduce their liquidity buffers.

A strong local deposit franchise will continue to support funding. Banks have accumulated local deposits over the past 18 months, and we expect strong deposit growth will continue through 2024 as the economy remains supportive, leading to stronger cash flow generation from corporates. Given the UAE's expat-heavy population structure, potential deposit volatility could emerge under extreme economic or geopolitical shocks.

Primary Credit Analyst

Puneet Tuli
Dubai
puneet.tuli@spglobal.com

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Loan growth

Sector-average growth in loans.

8.0% 2024 forecast

7.0% 2023 estimate

4.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.2% 2 024 forecast

5.3% 2023 estimate

5.5% 2022 actual

RoAA

Sector-average return on average assets.

1.9% 2 024 forecast

2.0% 2023 estimate

1.5% 2022 actual

Figures as of fiscal year ending December.

Uzbekistan | BICRA group: 8

Economic Growth Supports The Banking Sector's Expansion

Key takeaways

• The banking sector is well positioned to continue performing well in 2023-2024, supported by solid economic growth, improving business activity, and strong deposit dynamics.

• We expect credit losses will remain elevated at about 2.0%-2.2% in 2023-2024, while nonperforming assets (NPA) will be 5.5%-6.5% of total loans.

Economic risks remain high, restricting some Uzbek banks' business growth, earnings prospects, and funding sustainability, especially those of smaller players.

Key credit drivers

Strong economic growth will underpin good banking sector performance. We expect solid GDP growth of about 5.4% over 2023-2026. This reflects Uzbekistan's gradual success in implementing its reform and economic modernization agenda. Uzbekistan has benefitted from stronger-thanexpected remittance inflows and money transfers, primarily from Russia. An increase in exports to Russia and other countries in the region is also aiding economic growth. Although we expect that remittances will start normalizing and economic prospects will be volatile because of the ongoing Russia-Ukraine conflict and slowing global economic activity, we expect strong new business growth and stable profitability in the banking sector over the next two years.

Asset quality will continue improving in line with new lending growth. Credit costs will likely continue normalizing toward 2.0%-2.2% in 2023-2024. We expect NPAs under IFRS of 5.5%-6.5% in 2023-2024, reflecting the balance of Uzbekistan's good economic growth prospects against banks' lending growth, relatively high risk appetite, and still-weak underwriting standards.

Key assumptions

We expect lending growth to increase gradually to 20%-25% in 2023-2024, thanks to supportive macroeconomic conditions and strong retail lending demand. Uzbek banks did not suffer materially from Russia's recession or sanctions on Russian entities, due to their limited exposure. Strong capital inflows observed in 2022 have been gradually normalizing in 2023. However, we do not consider that this poses a significant risk for the sector. Uzbek banks will continue benefitting from active growth of retail banking business. At the same time, we expect that aggressive growth in auto lending will start slowing down.

Inflation will remain high at about 9%-11% over 2023-2024. We expect banks to continue investing in digital transformation to improve their cost efficiency and product offering.

What to look for over the next year

Government to push ahead with its wide-ranging reform agenda. This includes the privatization of some state-owned enterprises, as illustrated by the recent acquisition by OTP Bank of 75% of the Uzbekistan government's stake in Ipoteka Bank. Nonetheless, decision-making will remain centralized, and the perception of a high level of corruption will likely remain for the next few years. Although the entrance of foreign players will likely intensify competition, we consider that the landscape of the banking sector will remain rather stable over the next few years.

Primary Credit Analyst

Natalia Yalovskaya
London
natalia.yalovskaya@spglobal.com

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Loan growth

Sector-average growth in loans.

25.0% 2024 forecast

22.0% 2023 estimate

19.5% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.5% 2 024 forecast

6.5% 2023 estimate

7.4% 2022 actual

RoAA

Sector-average return on average assets.

1.9% 2024 forecast

1.9% 2023 estimate

2.1% 2022 actual

Figures as of fiscal year ending December.

Asia-Pacific

Australia | BICRA group: 3

Low Unemployment A Shield Against Credit Losses

Key takeaways

• We forecast banks' credit losses will remain low over the next two years.

• Demand-supply dynamics are contributing to strong growth rates in home prices.

• Rising consumer prices, high interest rates, fragile business and consumer confidence, and an uncertain global economic outlook pose risks.

Key credit drivers

The Australian banking system's industry risks could diminish over the next two years. We see the possibility of a reduction in the industry's risk appetite or a lower likelihood of significant regulatory lapses--for example, due to the simplification of business models of the larger Australian banks. Industry risks could also diminish if we believe the financial sector's net external liabilities are likely to remain well below 20% of domestic customer loans.

Credit losses should remain low. Credit losses over the next two years should remain low; that is, at about pre-pandemic levels of 15 basis points. We believe that low unemployment levels, modest economic growth and a change in spending patterns will shield borrowers against the rising interest burden as borrowers shift mortgages from lower fixed rates to higher variable rates as fixed rate mortgages reach their expiration date.

Key assumptions

House price growth has picked up over the past six months. A resumption of immigration-driven population growth along with limited new housing supply is driving house prices higher following an orderly correction earlier. On the flip side, higher interest rates, rising consumer prices, and fragile business and consumer sentiment could stifle growth.

Lending standards remain conservative. We believe underwriting standards will remain conservative and banks will continue to price rationally for risks, affording the sector some buffer for unexpected situations. The earnings of Australian banks should stay strong relative to global peers.

What to look for over the next year

Various uncertainties pose risks. Australian banks are exposed to risks from rising consumer prices, high interest rates, fragile business and consumer confidence, and an uncertain global economic outlook. Given the large increase in interest rates and prices in the past year, we consider that some households and businesses will struggle to service their debt. Particularly vulnerable will be the individuals who lose their employment or income, are highly leveraged, and borrowed when house prices were near their peak. Nevertheless, we consider such borrowers form a small part of the banks' loan books.

Technology risks on the rise. Cyber threats continue to present a risk for Australian banks. Accelerated digitalization has increased such risks and could lead to more severe cyber attacks that trigger higher losses.

Primary Credit Analyst

Nico DeLange
Sydney
nico.delange@spglobal.com

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Loan growth

Sector-average growth in loans.

5.5% 2024 forecast

5.6% 2023 estimate

9.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.9% 2024 forecast

0.9% 2023 estimate

0.9% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.7% 2023 estimate

0.7% 2022 actual

Figures as of fiscal year ending June.

Bangladesh | BICRA group: 9

External Sector Volatility Presents Significant Risk

Key takeaways

• Liquidity stress can further deteriorate for banks if Bangladesh's external position weakens. Sluggish remittances and a frozen interbank market have made it difficult for banks to service their obligations in U.S. dollars--mainly leading to delays in servicing foreign currency letters of credit.

Banks to get some benefit from the introduction of the six-month moving average treasury rates-based (SMART) lending benchmark; however, overall profitability is likely to remain modest.

• Structural challenges persist for the banking system.

Key credit drivers

Weak profitability to continue. We expect credit growth of 11%-13% in the system. The banks are likely to see some benefit from the introduction of the SMART-based benchmark lending rate--under which loans can be priced 3% higher than the benchmark as compared with the earlier fixed rate cap. Banks should also benefit from the 1% additional fee that could be levied on the micro, and small to midsize industries, and retail customers to cover supervision costs. However, the rise in the cost of funds as the central bank tries to tame high inflation should temper these benefits.

Weak asset quality. Bangladesh's banking industry faces structural asset-quality challenges from weak lending standards and foreclosure laws. State-owned banks continue to hold substantial amounts of weak assets. Ongoing macroeconomic challenges due to inflation, depreciation in the Bangladeshi taka against the U.S. dollar, and import restrictions could lower corporate borrowers creditworthiness. This will strain the banks' asset quality over the next two years. A COVID-related moratorium facility ended for banks at the end of December 2022. That said, banks still carry COVIDrelated restructured loans and could see higher slippages from the restructured book. The debt repayment burden for borrowers is likely to increase because of higher interest rates and tightening liquidity, which are the consequence of monetary policy to stem inflation.

Key assumptions

Currency volatility and high inflation stalk the economy. The Bangladesh economy is weathering a period of heightened external pressure due to currency depreciation, elevated commodity prices, and declining foreign exchange reserves.

Structural challenges remain. Bangladesh's banking industry will face structural challenges from high credit risks, the fragmented nature of the system, weak governance at some banks, weak liquidity of some Islamic banks and the low capitalization of state-owned banks.

What to look for over the next year

Reform agenda. Bangladesh is likely to adopt some reforms in its banking sector as well those suggested by the IMF.

Shinoy Varghese
Singapore
shinoy.varghese1@spglobal.com

Primary Credit Analyst

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Loan growth

Sector-average growth in loans.

12.0% 2024 forecast

12.0% 2023 estimate

12.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

11.5% 2024 forecast

10.5% 2023 estimate

8.2% 2022 actual

RoAA

Sector-average return on average assets.

0.3% 2 024 forecast

0.3% 2023 estimate

0.4% 2022 actual

Figures as of fiscal year ending December.

Brunei | BICRA group: 6

Balance Sheets To Remain Strong Amid Slow Growth, High Rates

Key takeaways

We anticipate the banks' earnings will continue to benefit from higher interest rates in the next 12-18 months before normalizing in line with federal reserve fund rates.

• Loan growth to remain muted, reflecting the soft economy and constrained retail activity.

• Banks are likely to maintain strong balance sheets.

Key credit drivers

We project muted growth for the banking sector. We expect bank loan books to expand by 2% over the next few years, lower than 4.4% level seen in 2022, given the softer real economy amid headwinds to external demand. The bulk of this growth is likely to come from wholesale customers as the government looks to boost the economy and support local firms through contracts from government-linked companies, foreign direct investment projects, the oil and gas sector, and infrastructure development. Regulations on the total debt service ratio and a saturated market should continue to constrain retail demand.

Bank balance sheets are strong. The banking sector had a Tier-1 capital ratio of 20.2% and a loan-todeposit ratio of 40.3% as of June 2023. Brunei banks have robust liquidity, given the strong surpluses at the country's government and related enterprises, and limited lending opportunities. Bank earnings have benefited from high global interest rates and the low-cost deposit base of banks. Deposit rates have been climbing up; however, the banking sector will report strong earnings, benefitting from a high U.S. federal funds rate at more than 5% in 2023 and 2024. Typically the Brunei banking sector benefits via both lending rate repricing and treasury income during high U.S. rates.

Key assumptions

A high-income economy intertwined with developments in the energy market. Brunei's oil and gas industry accounts for close to half of the country's GDP and more than 70% of government revenues. The economic performance of the country remains tied to global energy prices and domestic oil and gas output as several production facilities are mature. That said, the government's strong net fiscal asset position and oil wealth accumulated over several years are buffers against shocks.

Recently, Brunei's real GDP growth has been weak due to aging energy fields, leading to production disruptions and need for rejuvenation. At the same time, high energy prices have benefited nominal growth. We expect the expanding downstream oil and gas industry to support growth in the next few years. Since the start of operations at Hengyi Refinery and Brunei Fertilizer Industries, the petrochemical sector has accounted for a growing share of the economy.

Government to remain supportive. In our view, there is a high likelihood that the Brunei government would provide timely and sufficient extraordinary support to major local banks, if needed.

What to look for over the next year

Financial sector reforms. There is progress toward the establishment of a bond market and a stock exchange to create alternative funding routes.

Primary Credit Analyst

Ruchika Malhotra

Singapore ruchika.malhotra@spglobal.com

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Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

2.0% 2023 estimate

4.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.4% 2 024 forecast

3.3% 2023 estimate

3.3% 2022 actual

RoAA

Sector-average return on average assets.

1.9% 2024 forecast

1.9% 2023 estimate

1.3% 2022 actual

Figures as of fiscal year ending December.

Cambodia | BICRA group: 9

Near-Term Economic Risks To Keep The Credit Losses Elevated

Key takeaways

• Banks will continue to expand balance sheet but at slower pace than pre-pandemic levels.

• Credit losses will stay high due to near-term economic risks to asset quality.

• Profitability under pressure from stiff price competition and elevated credit costs.

Key credit drivers

Credit growth will remain lower than pre-COVID levels. Customer demand has moderated due to macro headwinds and a weak external environment. This, combined with tighter funding conditions and normalizing reserve requirements, will restrain lending. We see a risk that once economic growth is back in line with long-term potential, credit growth could gallop higher.

Profitability is under pressure. Predominantly fixed-rate asset books and stiff competition are forcing Cambodian banks to absorb higher deposit costs while loan repricing lags. This will squeeze revenues, together with elevated provisions.

Key assumptions

Near-term macroeconomic risks remain high. This is given the Cambodia economy's high external dependence and a volatile real estate sector. As a result of the uncertainties, banks are likely to maintain high provisioning to cushion against potential hits to asset quality. We expect credit losses to stay elevated.

Strong funding from foreign parents will provide support. Funding and liquidity have become tighter over the past 12-18 months. Cambodian banks have very elevated loan-to-deposit ratios, but they will also continue to benefit from being deposit-funded and backed by foreign parents. This partly mitigates pressure from interest rate hikes and tighter liquidity.

What to look for over the next year

Imbalances could reduce if slower credit growth is more structural than cyclical. The central bank is in the process of aligning banks to international standards via Basel implementation in 2024 and encouraging structurally slower credit growth. This, in our view, would require a shift in mindset of lenders operating in a high-risk appetite environment. In our experience, these changes don't occur quickly, given competitive pressures to grow income can prevail over prudence.

Exposure to construction and real estate will remain an Achilles heel. The system's large share of high-risk exposures leaves banks exposed to correction, particularly construction and real estate at nearly a fifth of the loan book.

Risks from the microfinance sector's aggressive growth will remain elevated. The fast-growing and underregulated microfinance sector--with an LTD ratio of more than 200%--and more aggressive lending practices than banks reflect higher credit risks.

Primary Credit Analyst

Ruchika Malhotra

Singapore ruchika.malhotra@spglobal.com

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Loan growth

Sector-average growth in loans.

13.0% 2024 forecast

13.8% 2023 estimate

19.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

4.7% 2 024 forecast

4.0% 2023 estimate

3.6% 2022 actual

RoAA

Sector-average return on average assets.

1.1% 2024 forecast

1.2% 2023 estimate

1.4% 2022 actual

Figures as of fiscal year ending December.

China | BICRA group: 6

Revenue Pressure Continues To Support Economic Recovery

Key takeaways

• Declining net interest margin (NIM) is pressuring sector profitability. This will be partly mitigated by economic recovery, which should heal loan quality and lower credit costs.

Pockets of stress remain, such as property loan exposure and loans to local government financing vehicles (LGFVs) in debt-laden regions.

• New asset classification rules will improve information quality. But big strides will take several years for banks with less capital buffer to recognize more bad loans.

Key credit drivers

Revenue pressure weighs on profitability. Mortgage repricing and policy-driven concessions to support economic recovery are eating into margins. But asset quality should improve with a more entrenched recovery. This lowers credit costs for the Chinese commercial banking sector over 2023- 2025, mitigating the pressure on their profitability.

Smaller regional banks face bigger pockets of risk. The property market is taking another downward lurch, and the situation is most dire in lower-tier cities, posing risks to local banks in these regions. Highly indebted city governments, strained by falling land sales, might be forced to cut ties to weak state-owned enterprises. More LGFV debt restructuring will pressure the capital and earnings of local banks in these debt-laden regions.

Key assumptions

Economic conditions to improve amid policy support. We estimate China's annual GDP growth will recover to an average of 4.7% over 2023-2025, up from 3% in 2022. Loan growth is likely to average around 10% over 2023-2025. Policies that favor lending to small companies to support jobs and income recovery will keep the bad debt of these companies manageable. Meanwhile, weak property sales will delay the recovery of developers' loan quality.

Nonperforming assets (NPAs) to fall over 2023-2025. The NPA ratio is our broader measure of asset quality. It incorporates our estimate of loans that are overdue by a minimum of 90 days, and restructured loans. This ratio is set to decline to about 5% at end-2025, from our estimate of 6.5% at end-2022. Write-offs and credit costs will fall to 0.8% and 1.1% of average loans in 2025 from our estimates of 1.0% and 1.3% in 2022 as a result.

What to look for over the next year

Pressure on revenue growth. Policymakers have set a modest GDP growth target to control macro leverage and financial risk amid weak household demand. We project overall loan growth to fall to 10.2% in 2024 from 11.6% in 2023. NIM contraction and concessions to policy-preferred sectors also put pressure on the sector's revenue growth.

Tighter regulations and LGFV debt restructuring to hit aggressive banks. New asset classification rules will cover all non-loan credit assets on- and off-balance sheet, applicable to new business from July 1, 2023, and existing business by end-2025. Meanwhile, new capital rules from Jan. 1, 2024 will ease strain on the Chinese banks’ capital buffers amid declining profitability.

Primary Credit Analyst

Ming Tan
Singapore
ming.tan@spglobal.com

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Loan growth

Sector-average growth in loans.

10.2% 2024 forecast

11.6% 2023 estimate

10.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

5.0% 2024 forecast

5.4% 2023 estimate

6.5% 2022 actual

RoAA

Sector-average return on average assets.

0.7% 2 024 forecast

0.7% 2023 estimate

0.8% 2022 actual

Figures as of fiscal year ending December.

Hong Kong SAR | BICRA group: 2

Strong Fundamentals Provide Cushion Against Headwinds

Key takeaways

Prudent underwriting standards, strong capital, robust funding and liquidity, together with effective regulatory monitoring underline the strong fundamentals of the sector.

Profitability to be broadly stable over the next two years, after improving in 2023 on the back of high net interest margins (NIM). We expect NIM to modestly decline from 2024 onward.

Key credit drivers

Asset quality pressure from exposure to China commercial real estate (CRE) will likely be

manageable. We expect nonperforming asset ratios for the banking sector to slowly decline in the coming years. This is after some deterioration in the recent two years, mainly due to China CRE exposure, which accounts for 5%-10% of the total consolidated loan book on average. In the past two years, the banks have been building provisions for this exposure and downsizing their China property loan books. Policy support in the mainland will also help support home-buyer sentiment, albeit gradually, in our view. Incremental provisions from China's property sector should be manageable over the next two years. We expect a credit cost of about 40 basis points (bps) for Hong Kong banks in 2023, broadly similar to the 2022 level, before a gradual decline to about 35 bps in 2024.

Strong fundamentals. Solid bank capitalization owing to controlled lending, regulatory additional Tier-1 capital issuances, sufficient internal capital generation, and, in some cases, asset disposals give Hong Kong banks more buffer to absorb losses. Banks also benefit from stable customer deposits and a limited reliance on short-term wholesale funding.

Key assumptions

Economic growth will remain largely steady. We project Hong Kong’s economy to grow about 2.6% in 2024 and 2.7% in 2025. However, any substantial setback to China's recovery due to the property crisis worsening, weak external demand, and intensifying geopolitical frictions could weigh on Hong Kong banks.

NIM expected to decline in 2024. As tightening by the U.S. Federal Reserve reaches its end, the interest rate tailwind for NIM is set to wane from 2024. We expect average NIM in the banking sector to decline by 5-10 bps in the coming two years from about 1.3% in 2023. Fee and commission income could see some growth, subject to wealth management and bancassurance activity gaining pace in 2024.

Residential prices are likely to soften in 2024. This is mainly driven by our expectation of interest rates staying higher for longer and the supply glut in the property market. We expect prices to remain broadly flat in 2023.

What to look for over the next year

Downside risk to China's economic growth. A deeper knock to property sector sales than we expect could stall China's economic recovery. This could have a potential contagion impact on Hong Kong's banking sector as well.

Primary Credit Analyst

Shinoy Varghese
Singapore
shinoy.varghese1@spglobal.com

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Loan growth

Sector-average growth in loans.

4.0% 2024 forecast

1.0% 2023 estimate

0.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.4% 2 024 forecast

1.5% 2023 estimate

1.4% 2022 actual

RoAA

Sector-average return on average assets.

0.8% 2024 forecast

0.7% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

India | BICRA group: 5

Enhancing System Resilience: Structural Improvements And Sound Economic Prospects

Key takeaways

Structural improvements and good economic prospects to support the resilience of financial institutions.

Stronger balance sheets and higher demand should boost bank loan growth, but deposit growth to lag.

• Disparity in the performance of banks to persist.

Key credit drivers

Economic growth momentum to continue. India's economic growth prospects should remain strong over the medium term, with GDP expanding 6%-7.1% annually in fiscal years 2024-2026.

Asset quality to continue to improve. We project the banking sector's weak loans will decline to 3%- 3.5% of gross loans by March 31, 2025, on the back of structural improvement, including healthy corporate balance sheets, tighter underwriting standards, and improved risk-management practices. Likewise, we forecast the credit costs to normalize to 1.2% for the next couple of years. The small and midsize enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But we believe interest rates in India are unlikely to rise materially. This should limit the risk for the banking industry. Unsecured personal loans have grown rapidly and could contribute to incremental NPLs. We believe underwriting standards for retail loans generally remain healthy and overall level of delinquencies remains within acceptable limits for this product category.

Key assumptions

Global uncertainties to have lesser impact on the economy. Slower global growth and external demand will weigh on economic activity and could fuel further inflation. However, given that India is domestically oriented, we expect the economic growth to be less affected.

What to look for over the next year

Good credit momentum but deposit growth to lag. In the next few years, we expect loan growth to be in line with nominal GDP, with retail loan growth exceeding corporate loan growth. Corporate borrowing is gaining momentum, but the uncertain environment may delay capital expenditurerelated growth. Deposits may find it hard to keep pace, thus weakening credit-to-deposit ratios. Despite this, banks' funding profiles should remain sound, supported by strong deposit franchise. Lagged repricing of deposits, rising competition for deposits and shift from low yielding CASA to higher interest bearing term deposits will squeeze NIMs to 3% in fiscal 2024 and 2.9% in fiscal 2025.

Disparity in the performance of banks. System return on average assets to be adequate at 1.1%, but polarization to persist. State Bank of India and the leading private-sector banks have largely addressed their asset-quality challenges. Many public-sector banks still carry relatively high volume of weak assets, which will result in higher credit losses and hit profitability; their performance lags that of the industry. Similarly, we expect a mixed-bag performance for finance companies (fincos). The asset quality of these fincos is often weaker than that of major private-sector banks.

Primary Credit Analyst

Deepali V Seth Chhabria Mumbai deepali.seth@spglobal.com

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Loan growth

Sector-average growth in loans.

12.0% 2025 forecast

12.0% 2024 estimate

15.0% 2023 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.5% 2 025 forecast

4.5% 2024 estimate

5.1% 2023 actual

RoAA

Sector-average return on average assets.

1.1% 2025 forecast

1.1% 2024 estimate

1.2% 2023 actual

Figures as of fiscal year ending March.

Indonesia | BICRA group: 6

Riding The Economy's Growth Momentum

Key takeaways

• Banks' profitability and loan growth benefit from Indonesia's buoyant economic growth.

• Extension of forbearance around post-COVID restructured loans to weigh on asset quality.

• Overall profitability supported by declining credit costs and high net interest margins.

Key credit drivers

Solid economic growth. We forecast real GDP growth of 5.0% in 2023 and 4.9% in 2024--one of the highest in the region. Economic conditions have supported banks' asset quality and performance. Indonesia will hold elections in February 2024. The country has a record of democratic transitions of power. We do not anticipate major policy changes, regardless of the election's outcome.

Extension of COVID-restructured loans weigh on asset quality. The extension will last until March 2024 and applies to all micro, small and midsize enterprises (SMEs), and to industries such as textiles and hospitability. COVID-restructured loans, which peaked at about 18% of total loans in 2020, declined to 5.5% as of June 2023. We forecast such loans will fall to about 5% by end-2023 as the economy recovers, and borrowers start repaying. In our opinion, one-eighth to one-fifth of the restructured loans are at risk and vulnerable to slippage into nonperforming loans (NPLs). They could add up to 1 percentage point of NPLs, which would crystallize in March 2024 when the moratorium expires, suggesting that NPLs could peak at 3.0%-3.5% in 2024.

Key assumptions

Moderating loan growth, declining credit costs. Banks have high liquidity and are well placed to expand loan books. We forecast loan growth will be 9%-10% for 2023 and 2024, at the lower end of banks' guidance, reflecting higher interest rates, which would crimp borrowing. At the same time, credit costs will recede to 90-110 basis points (bps), from their COVID peak of 270 bps in 2020.

Strong capital buffers and good earnings underpin ratings. The banks are among the best capitalized in the region, with average Tier-1 capital ratio of 25.2% and capital adequacy ratio of 26.7%, as of June 2023. The sector's profitability, as measured by a return on assets (ROA), has surpassed pre-pandemic levels to reach 2.7% as of June 2023, supported by lower credit costs. The banking system will likely rank among the most profitable in the region by a considerable margin.

What to look for over the next year

Interest-margin dynamics. Previous tightening cycles compressed net interest margins (NIMs). Unlike other regions, lending rates in Indonesia have remained flattish despite central bank rate hikes. Banks have difficulty passing through to the large corporates, while SMEs under restructuring might struggle to absorb higher costs. Costs of funding have edged up as term deposits reprice. We expect NIMs to compress by 10-15 bps in 2023. This should be manageable, considering Indonesia banks have NIMs of 4.8% as of June 2023. We project a 100 bps reduction in policy rates, which we believe will lead to interest margins expansion as funding costs recede faster than sticky lending rates.

Primary Credit Analyst

Ivan Tan
Singapore
ivan.tan@spglobal.com

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Loan growth

Sector-average growth in loans.

10.0% 2024 forecast

9.0% 2023 estimate

11.4% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.5% 2024 forecast

2.8% 2023 estimate

2.4% 2022 actual

RoAA

Sector-average return on average assets.

2.7% 2024 forecast

2.6% 2023 estimate

2.4% 2022 actual

Figures as of fiscal year ending December.

Japan | BICRA group: 3

Manageable Downside Amid Differing Debt Dynamics

Key takeaways

• Japan's banks should remain resilient to uncertainties in domestic and global economies.

We foresee the domestic private sector’s gross debt growing more slowly than GDP in the next two years and Japan's economy continuing its steady growth in 2024.

With yen rates likely to rise, the positive effects of improving rates will outweigh negative effects such as increasing unrealized losses on bond holdings.

Key credit drivers

Systemwide funding remains a key strength of Japan's banking industry. Japan-based banks typically benefit from high and stable deposit bases. This reflects corporate and household net financial positions that are in surplus, as well as Japanese individuals' strong preference for savings. High coverage rates for deposit insurance (about 70% of the sector's total deposit balance) and virtually no competition on interest rates between deposits and money market funds or money reserve funds are factors that work positively to maintain customers' confidence in bank deposits.

Raising rates will spur volatility. Banks have had increased net profit on higher interest incomes over the past two years. We expect a gradual increase in Japan’s policy interest rate through to 2025. Higher interest rates are generally positive for banks' net interest incomes and outweigh negatives. Banks have also curbed risks related to holding U.S. Treasuries. However, valuation losses on banks' bond holdings need careful monitoring because they may exceed our expectations, especially for securities’ investment-oriented banks.

Key assumptions

Challenges remain, but economic growth will continue. We expect real GDP growth of 1.0% in each of 2024 and 2025. Although slower global growth and external demand in 2024 will weigh on economic activity, we expect a relatively limited effect on Japan's growth, given a more domesticoriented economy and continuing low inflation of about 3%.

Japan's private sector debt level has shown different trends on a gross and net basis. We see a temporary rise in the country's private sector gross debt level between 2019 and 2022 at the same time as its net debt (gross debt minus cash and deposits) declined. With the corporate sector already having ample cash at hand, we foresee private sector gross debt growing more slowly than GDP and expect credit costs to remain low at about 0.2% over loan exposures.

What to look for over the next year

Uncertainties about domestic consumption, higher inflation, and yen weakness. Our base case is for slow but steady economic growth and a gradual increase in the policy rate in 2024-2025. However, higher inflation and slower global economic growth than our expectations may become risk factors for banks' profitability. Higher inflation for longer than expected may also become a risk. For now, Japan's corporate sector is generally generating profit growth on weaker yen exchange rates. But this will cause pain for some less-competitive corporates unable to pass on increasing costs to customers. Higher inflation may also weaken consumer sentiment.

Primary Credit Analyst

Ryoji Yoshizawa
Tokyo
ryoji.yoshizawa@spglobal.com

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Loan growth

Sector-average growth in loans.

2.0% 2 024 forecast

2.0% 2023 estimate

2.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.0% 2024 forecast

1.0% 2023 estimate

1.0% 2022 actual

RoAA

Sector-average return on average assets.

0.3% 2 024 forecast

0.2%.2023 estimate

0.2% 2022 actual

Figures as of fiscal year ending March.

Korea | BICRA group: 3

Banks Will Likely Navigate Rougher Operating Conditions

Key takeaways

• Adequate underwriting standards and risk management will likely prevent significant deterioration in asset quality despite Korea's high private-sector leverage.

• Banks' build-up of additional provisioning will be a cushion against strain in asset quality.

• Sizable and stable customer deposits underpin system-wide funding.

Key credit drivers

Asset quality deterioration to be manageable. A rapid rise in domestic interest rates and subdued property market conditions will strain banks' asset quality amid the high private-sector leverage. The banks' adequate underwriting standards, however, will likely prevent a material worsening of asset quality. These include low loan-to-value ratios for mortgage loans, tightened debt-servicing-toincome ratio requirements for household borrowers, and high collaterals for loans to small and midsize enterprises.

Larger provisioning buffers to absorb losses. The banks' build-up of additional provisioning would be a cushion against asset quality deterioration. The average loan loss reserve coverage against regulatory nonperforming loans was about 226% at end-June 2023 versus 112% at end-2019.

Low risk of systemwide funding. The banking system's funding structure benefits from its robust domestic core customer deposit base. Foreign-currency funding and liquidity risks are likely to be manageable despite a potential increase in financial market volatility. The banks' efforts to preemptively secure foreign currency liquid assets and the close regulatory oversight support our view.

Key assumptions

A resilient and diverse Korean economy. We forecast Korea's real GDP to increase 2.2% in 2024, compared with our estimate of 1.2% in 2023, supported by a gradual improvement in export demands.

Moderate loan growth. This reflects the banks' focus on risk management and moderate loan demands after a rapid increase in borrowing costs. The annual loan growth at 4%-5% will support the banks' adequate capitalization. This is despite a modest decline in profitability mainly due to net interest margin contractions as the domestic interest rates turn lower.

Low exposure to real-estate project financing loans. We estimate the banks' exposures to this segment are little over 1% of total loans at end-June 2023. Banks extend such loans to mostly residential projects in major cities, which we deem as relatively low risk.

What to look for over the next year

Higher credit risks especially for mutual savings banks. This considers their rapid growth led by corporate loans over the past several years and relatively large exposure to real-estate project financing loans. That said, mutual savings banks are small, accounting for about 3% of total loans in the banking system. They are unlikely to present material disruptions to the banking system.

Primary Credit Analyst

Daehyun Kim
Hong Kong
daehyun.kim@spglobal.com

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Loan growth

Sector-average growth in loans.

5.4% 2024 forecast

4.3% 2023 estimate

8.1% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

1.4% 2 024 forecast

1.3% 2023 estimate

1.0% 2022 actual

RoAA

Sector-average return on average assets.

0.5% 2024 forecast

0.6% 2023 estimate

0.5% 2022 actual

Figures as of fiscal year ending December.

Malaysia | BICRA group: 4

Prepared For Tougher Conditions

Key takeaways

• Credit demand could improve with lower inflation and a rate cut.

• Asset-quality deterioration should be manageable because corporate and household balance sheets remain robust.

• Profitability to stay range-bound with potential upside from write-back of provisions.

Key credit drivers

Credit growth could improve. We forecast sector loan growth could revive to 5%-6% in 2024, benefitting from lower inflation and a possible rate cut. We expect GDP growth of 4.5% in 2024, slightly higher than 4.0% in 2023. In our base case, we forecast that policy rates have peaked, and a 25-basis point (bps) rate cut is likely in 2024.

Solid capitalization and provisioning buffers could offset asset-quality pressure. Although not our base case, higher-for-longer rates and cost pressures could increase financial strain for low-income households and small to midsize enterprises. The solid capitalization (about 15.0% common equity Tier-1 ratio as of June 30, 2023) and provisioning buffers (1.6% of total loans) will help banks to absorb a moderate rise in credit stress.

Key assumptions

Asset quality deterioration should be manageable. The industry nonperforming loan ratio will likely rise to 2.0%-2.5% by end-2024 from 1.8% as of end-June 2023. The level of restructured loans has diminished steadily and stands at about 2%. Credit costs will stay at 20-30 bps, higher than prepandemic levels, because banks are likely to stay cautious amid global headwinds.

Earnings will stay range-bound. Banks' net interest margins could stabilize after an expected 10-20 bps decline in 2023 due to higher funding costs. Over the next two years, we forecast return on assets to stay range-bound at 1.2%-1.3%. Upside potential to profitability could come from lower credit costs if large banks choose to write back COVID-related provisions.

What to look for over the next year

Household leverage and labor market conditions. Malaysian banks' asset quality is closely correlated to employment conditions, given a large share of household loans. High household leverage poses some risk, in our opinion. However, stable employment conditions and adequate household financial assets are mitigating factors.

Property market disruptions. Banks have material exposure to real estate development and construction at about 8% of total loans. Oversupply issues in the commercial real estate market and elevated office vacancy rates remain structural challenges. Banks have been cautious in lending to this sector, resulting in a gradual reduction of exposure.

Primary Credit Analyst

Nikita Anand

Singapore nikita.anand@spglobal.com

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Loan growth

Sector-average growth in loans.

5.5% 2024 forecast

4.5% 2023 estimate

6.0% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.2% 2 024 forecast

2.0% 2023 estimate

1.7% 2022 actual

RoAA

Sector-average return on average assets.

1.3% 2 024 forecast

1.4% 2023 estimate

1.4% 2022 actual

Figures as of fiscal year ending December.

Mongolia | BICRA group: 9

Enhanced Capital Buffer To Support Credit Expansion

Key takeaways

• Mongolia's economy will likely continue to recover, backed by rise in exports to China following the normalized border access, and commodity price upturn.

• We believe the major banks' improved capital buffers, partly backed by their public listings, can support high credit growth over the next 12-18 months.

Implementation of single ownership limit of 20% on banks could improve their governance and transparency, although actual implementation timeline remains to be seen.

Key credit drivers

Improved capital buffers. Loss-absorbing capacity has strengthened for the domestic systemically important banks following their regulatory-driven listing on the Mongolian stock exchange by end-June 2023. These banks also complied with a 4% additional capital conservation buffer over the minimum regulatory Tier-1 capital ratio of 9% from July 1, 2022. The improved capital buffers will likely support high credit growth along with the economic recovery.

High dependence on commodity cycle. Mongolia's economy depends on commodities, and the concentration of its trading partners amplifies the banking sector's susceptibility to big shifts in commodity prices. Sluggish global growth increases the impact.

Inherent credit risk due to cyclical corporate exposures. The exposures to mining, wholesale and retail trading, and construction industries are material. We estimate the major banks' exposures to these sectors are about 35% of the total loans on average as of end-2022.

Key assumptions

Ongoing economic recovery, although downside risks remain. A rise in exports to China, the largest export market for Mongolia, following the normalized border access will continue to lead Mongolia's economic recovery. That said, downside risks include significant slowdown in global demand, high inflation, and currency volatility.

Moderating profitability. Banks' net interest margins are likely to narrow, considering the high growth appetite and intense competition in the domestic banking system. We also anticipate the sector's overall credit costs ratio to increase moderately in 2024, as the temporary benefit of large recoveries and net reversals on corporate exposures in recent years fades away.

What to look for over the next year

Implementation of single ownership limit of 20% remains to be seen. Banks in Mongolia should comply with this by end-2023 based on the current schedule. We believe the regulation could improve the banks' governance and transparency. However, we anticipate banks could encounter difficulties in finding strategic partners within the timeline given Mongolia's underdeveloped capital market. We note past delays in the implementation of other rules. Examples include IFRS-9 adoption, phased introduction of regulatory capital conservation buffers and IPO listing requirements.

Primary Credit Analyst

Shivani Rajani
Singapore
shivani.rajani@spglobal.com

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Loan growth

Sector-average growth in loans.

18.0% 2024 forecast

20.0% 2023 estimate

3.3% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

12.3% 2024 forecast

13.0% 2023 estimate

14.2% 2022 actual

RoAA

Sector-average return on average assets.

1.6% 2024 forecast

1.9% 2023 estimate

2.3% 2022 actual

Figures as of fiscal year ending December.

New Zealand | BICRA group: 4

Economic Imbalances Unwind

Key takeaways

• Major banks remain highly likely to receive timely financial support from their parents.

• An orderly unwinding in property prices has reduced some of the downside risk.

• Low unemployment should limit credit losses.

Key credit drivers

An orderly correction in house prices has reduced some of the downside risks to New Zealand financial institutions. While house prices have fallen more than 15% since their peak in late calendar 2021, growth has resumed in recent months. A resumption of immigration-driven population growth along with limited new housing supply should put a floor under house prices.

New Zealand major banks remain highly likely to receive timely financial support from their Australian parents, if needed. We envisage no change in the strategic importance of the four major New Zealand bank subsidiaries to their Australian parents. This will support the credit quality of the New Zealand major banks that account for over 90% of New Zealand banking assets.

Key assumptions

Credit losses to remain low. New Zealand banks' credit losses will likely remain low over the next two years. We estimate they will revert to about 10-15 basis points in the next two years. Most borrowers should be able to absorb the pressures from significantly higher interest rates, rising consumer prices, and a slowing economy with ongoing low unemployment.

Banks maintain profitability despite slowing credit growth. New Zealand banks should be able to maintain their return on equity at the fiscal 2022 level of about 13% over the next two years without any need to take undue risk, including aggressive pricing. This is despite a modest fall in credit growth. We project private sector credit growth to slow over the next two years, falling to 3% through 2025, below its 5% long-term average.

What to look for over the next year

House prices should continue to rise slowly. Strong recent population growth and tighter housing supply will continue to place upward pressure on house prices. The current restrictive interest rate settings will offset this to a degree moderating house price growth, particularly if interest rates stay higher for longer.

Economic growth to recover in 2024. Strong employment conditions, and a large pipeline of infrastructure and construction activity will support growth that we project to reach 1.8% in 2024. High inflation presents a downside risk as does high household indebtedness and geopolitical tensions.

Primary Credit Analyst

Lisa Barrett
Melbourne
lisa.barrett@spglobal.com

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Loan growth

Sector-average growth in loans.

3.0% 2024 forecast

3.0% 2023 estimate

5.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.6% 2 024 forecast

0.5% 2023 estimate

0.4% 2022 actual

RoAA

Sector-average return on average assets.

1.1% 2024 forecast

1.1% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending June.

Philippines | BICRA group: 5

Improving Macroeconomic Conditions To Support Banks

Key takeaways

• Credit growth could increase on lower inflation and rate cuts.

• Banks' return on assets will likely peak in 2023.

• Asset-quality deterioration should be marginal, with large corporates staying resilient.

Key credit drivers

Credit growth could improve. Higher economic growth, along with lower inflation and interest rates, will support credit demand. We forecast credit growth of 10%-12% in 2024, higher than the estimated 7%-9% in 2023. We expect GDP growth of over 6% in 2024 and 2025, compared with 5.2% in 2023.

Banks maintain good buffers. Elevated inflation and interest rates could erode household savings, putting a strain on low-income households and small to midsize enterprises. The sector's good capital position (15.2% Tier-1 ratio) and provisioning will cushion against any moderate rise in credit stress.

Key assumptions

Credit losses will stay flattish. We expect the sector's credit costs to stay at 0.6%-0.7% of gross loans in 2024. We forecast a manageable deterioration in nonperforming loan ratio. Large corporates, which form bulk of the sector's loan portfolio, should be able to absorb the higher input and financing costs. At about 12%, Philippine banks have relatively lower share of riskier unsecured consumer loans and small business loans than peers. Philippines' low household leverage of 10% of GDP also mitigates risk.

Earnings will peak in 2023. The sector's return on average assets could normalize to long-term average of 1.2%-1.4% over the next two years after peaking at about 1.5% in 2023. This is because net interest margins will decline in line with policy rate normalization. A moderating cost-to-income ratio and increasing share of retail loans could provide an upside to profitability over the next three years.

What to look for over the next year

Normalizing interest rates. We forecast policy rates could decrease by a total of 75 basis points in 2024 as inflation moderates. This should also help contain asset quality risks. However, if inflation and rates remain high, default risks for some leveraged and low-income borrowers could increase.

Property market disruptions. A sharp correction in asset prices would hurt asset quality given sizeable exposures to the residential and commercial real estate markets. Real estate loans form about 21% of sector loans with two-thirds of this being commercial real estate loans. We note that office vacancy rates have stayed sustainably elevated in metro Manila. While a fallout in property sector is not our base case, it remains a key downside risk amid higher interest rates and a global slowdown.

Primary Credit Analyst

Nikita Anand
Singapore
nikita.anand@spglobal.com

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Loan growth

Sector-average growth in loans.

10.0% 2024 forecast

8.0% 2023 estimate

11.7% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.6% 2 024 forecast

3.5% 2023 estimate

3.2% 2022 actual

RoAA

Sector-average return on average assets.

1.4% 2 024 forecast

1.5% 2023 estimate

1.4% 2022 actual

Figures as of fiscal year ending December.

Singapore | BICRA group: 2

Some Moderation On The Horizon After A Strong Start To 2023

Key takeaways

Buoyant net interest margin (NIM) gains will likely persist throughout 2023 before peaking in 2024.

• Loan growth will likely remain tepid as spikes in lending rates and economic headwinds weigh on appetites for consumer and business borrowing.

Asset quality should stay resilient, though an uptick in nonperforming assets is possible, given higher for longer interest rates.

Key credit drivers

NIMs to peak in 2024. We forecast interest margins will remain robust for the rest of 2023, before peaking at 2.0%-2.2% in 2024. Singapore lending rates are correlated with U.S. Fed rate, and we anticipate one more rate hike in this tightening cycle with peak rates persisting into the second quarter of 2024. Higher for longer interest rates will benefit the lending spreads of Singapore banks.

Resilient asset quality, with some manageable deterioration. The realities of higher borrowing costs, coupled with macro headwinds, will register more prominently in 2024. This could result in some backsliding in nonperforming loan (NPL) ratios following a relatively stable 2023. Consumers and small to midsize enterprises typically bear the brunt of high interest rates and economic slowdown. Downside risks are mitigated by a robust job market with very low unemployment; plus, the strong financial buffers of corporates. Any asset-quality deterioration should be manageable, with the NPL ratio remaining below 2%.

Key assumptions

Low-single-digit loan growth, controlled credit costs. Our base case assumes loan growth of 1%-3% over the next 12-18 months, with credit costs in the pre-COVID range of 20 basis points (bps)-25 bps.

Singapore's economic growth to remain subdued. GDP grew by just 0.5% year on year in the second quarter of 2023. Global macro conditions will continue to constrain external demand, while the resultant manufacturing slump will weigh on one of the country’s growth engines. Singapore should still grow 1.1% in 2023, by our estimates, before recovering to post 2.6% growth in 2024.

Singapore government is highly supportive of the banking system. We believe it will provide timely financial support to ensure the stability of the financial system, if needed. This in turn supports the banks' financial profile.

What to look for over the next year

Capital management has been a balancing act between prudence and efficiency. The former took precedence during COVID. The latter was more apparent in 2022 when banks reported record profits, which led to generous dividend payouts including special one-time payments. Notably, good profitability from NIM expansion amid tepid loan growth could prompt more generous dividend payouts. We believe management will continue to exercise good judgment in both capital and risk management, and tailor their decisions according to prevailing credit conditions.

Primary Credit Analyst

Ivan Tan
Singapore
ivan.tan@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

3.0% 2024 forecast

1.5% 2023 estimate

-2.6% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

2.0% 2024 forecast

2.0% 2023 estimate

1.8% 2022 actual

RoAA

Sector-average return on average assets.

1.2% 2 024 forecast

1.3% 2023 estimate

1.1% 2022 actual

Figures as of fiscal year ending December.

Taiwan | BICRA group: 4

Solid Capitalization Provides Buffer

Key takeaways

• The solid capitalization of Taiwan banks will provide a sufficient cushion to absorb a potential hike in credit losses.

• We expect steady profitability from sustained interest rate income but potentially weaker foreign exchange swap gains in 2024 following a high base in 2023.

We forecast the asset quality and provision buffers of Taiwan's banks will remain satisfactory compared with those of regional peers.

Key credit drivers

Solid capital buffer underpins stable credit metrics. We expect banks' capitalization to remain solid, with the support of prudent capital policies. As of end-June 2023, the average common equity Tier-1 capital ratio stood at 12.88% for the banking sector. This should provide a buffer for banks to absorb unexpected volatility.

A well-diversified retail deposit base supports the stable funding resilience of most Taiwan banks. A high ratio of household deposits (about 67%) over total system deposits underpins banks' funding stability. The liquidity ratio remains healthy, with loan-to-deposit ratio at 70% on average.

Key assumptions

Flat profitability but revenue mix is somewhat different. Banks will maintain their interest margins in 2024 as higher for longer interest rates will benefit the lending spreads of Taiwan banks and the contribution from fee income will slightly recover on rewarmed wealth management business. However, the contribution from foreign exchange swap gains is likely to be lower compared with the previous year. Overall, banks should maintain their return on assets at about 0.6%-0.7%.

Domestic property market to remain tepid in 2024. We expect the housing market to remain tepid, with muted growth of transaction volume in 2024. House prices could drop by mid-single digit percentage and may slightly recover from the second half of 2024.

What to look for over the next year

Stable asset quality with manageable nonperforming assets. In our view, the asset quality and provision buffers of Taiwan's banks will still be satisfactory compared with those of regional peers. We expect banks' nonperforming assets ratio to remain low at about 0.3% amid a tepid economic outlook in 2024. The enhanced financial buffers of Taiwan corporates will mitigate downside risks.

Environmental, social, and governance (ESG) to gradually shift the banks' business strategies. Following Taiwan's decision to enshrine in law its target of net-zero emissions by 2050, the ESG trend has gradually shifted the banks' business strategies. This will include an expansion of their lending portfolios on green energy-related sectors. In addition, lead banks have begun to collaborate with clients on transforming their business to meet low carbon emissions requirements.

Primary Credit Analyst

Yuhan Lan
Taipei
yuhan.lan@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

6.5% 2024 forecast

4.5% 2023 estimate

6.9% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

0.3% 2024 forecast

0.4% 2023 estimate

0.2% 2022 actual

RoAA

Sector-average return on average assets.

0.6% 2 024 forecast

0.7% 2023 estimate

0.6% 2022 actual

Figures as of fiscal year ending December.

Thailand | BICRA group: 7

Elevated Credit Costs To Weigh On Thai Banks

Key takeaways

Economic risk remains high, given structural constraints from high household leverage and a slow and uneven recovery.

Credit costs to stay elevated. But spikes in NPLs are unlikely due to aggressive NPL management. Banks have been selling off or writing off bad loans.

• Strong capitalization and high provisioning coverage provide downside protection.

Key credit drivers

Credit risk remains heightened due to structural issues. These include high household debt and corporate debt as well as pre-existing weaknesses in the small to midsize enterprise (SME) segment.

Thailand's household leverage, at 89%, is one of the highest among emerging markets and has reached unsustainable levels, leading to elevated risk of default. Many SMEs remain vulnerable too due to their inability to fully pass on a rise in production and borrowing costs, further squeezing their profits. The government is taking steps to repair household balance sheets and boost SMEs' competitiveness. Policy measures, however, require time to crystallize and effect a structural shift.

Stabilization in economic activity. We expect real GDP growth to get support from increased exports in 2024 alongside further normalization in the tourism sector. It may also get a temporary fillip by the new government's plan to grant cash handouts to boost consumption. Elevated household leverage would weigh on debt-servicing capability. Nevertheless, interest rates are expected to moderate from next year, mitigating downside risks.

Key assumptions

Orderly unwinding of imbalances. Our base case projects an orderly unwinding of imbalances. Banks' credit costs for the system (as measured by credit costs of the top six banks, which form 80% of the banking system) should remain elevated at 1.5% for the next two years at least. Banks have aggressively managed bad loans by selling them off, or in writing them down. That and stabilizing economic trends will help prevent a post-forbearance jump in NPL ratios, which may inch up to 3.5% of total loans by 2025, from 2.8% as on June 30, 2023.

Good capital and provisioning levels offer some cushion. Thai banks generally have good credit buffers relative to peers, with high capital adequacy ratios at 19.5% and provision coverage at about 176%, as of June 30, 2023. Banks' improving earnings also aided these buffers. We believe the Thai banks we rate can absorb the blow from deteriorating asset quality.

What to look for over the next year

Performance of restructured loans. NPLs haven't spiked, given ongoing relief measures. But at 10%, the high proportion of the banks' loan books under relief measures points to incipient problems in the system. We assume 15%-20% of restructured loans will require additional support and, in the absence of support, could miss payments, increasing slippages in 2024-2025. This can change depending on the pace of economic revival.

Primary Credit Analyst

Deepali V Seth Chhabria Mumbai deepali.seth@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

3.7% 2024 forecast

2.6% 2023 estimate

2.1% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.2% 2 024 forecast

2.8% 2023 estimate

2.8% 2022 actual

RoAA

Sector-average return on average assets.

1.0% 2024 forecast

1.1% 2023 estimate

1.0% 2022 actual

Figures as of fiscal year ending December.

Vietnam | BICRA group: 9

On A Gradual Path To Recovery

Key takeaways

• A gradual recovery of the property sector and global economy will likely support Vietnam's economic performance.

• Bank profitability pressure to ease slightly as deposit rates decrease.

• Structural challenges persist.

Key credit drivers

Credit growth. Credit growth in Vietnam is likely to be 11%-13% over the next 12-18 months, with downside risks. While most state-owned banks are capital constrained, several mid-tier privatesector banks are likely to expand briskly. In our view, the key risks are rising indebtedness in the economy and thin capital buffers of some banks.

Returns on assets to remain flat. Net interest margins are likely to have bottomed out in 2023 after several round of policy rate cuts by the central bank. Banks are likely to reprice deposit downwards, providing some relief on their cost of funds. However, lower lending rates--to continue supporting the economy--may offset this. We anticipate muted growth in noninterest income because we expect bond issuances to remain low.

Risks remain despite accommodative policies. Vietnam has experienced brisk credit growth over the past few years, with overheated real estate and corporate bond markets, which eventually cooled in 2023. The property and bond markets are likely to recover slowly in 2024 as authorities introduce various measures to support the economy. Nonetheless, we expect credit costs to remain elevated as banks deal with remnants of the property sector stress and slowing global economy.

Key assumptions

Vietnam's economy is likely to see improvements in 2024. Vietnam's growth is likely to increase to 6.5% in 2024 after slowing in 2023 as the global economy and trade picks up and our expectation that domestic monetary policy will remain accommodative. The medium-term outlook is benign--the economy is increasingly diversified, with a booming manufacturing sector, largely funded by foreign direct investment (FDI). The country's attractiveness as a destination for FDI in Southeast Asia with a young and increasingly educated and competitive workforce should help to keep long-term development intact.

What to look for over the next year

Capital management. Capital buffers at several Vietnamese banks remain thin, and some stateowned banks need help to improve capitalization.

Structural challenges remain. Structural challenges include high and increasing leverage in the economy; the high exposure of some banks to the real estate sector; thin capitalization; and weak asset quality recognition.

Primary Credit Analyst

Sue Ong
Singapore
sue.ong@spglobal.com

Read latest report

Loan growth

Sector-average growth in loans.

12.5% 2024 forecast

13.0% 2023 estimate

14.2% 2022 actual

NPA ratio

Nonperforming assets as a % of system wide loans.

3.6% 2 024 forecast

2.8% 2023 estimate

2.0% 2022 actual

RoAA

Sector-average return on average assets.

0.9% 2 024 forecast

1.0% 2023 estimate

1.3% 2022 actual

Figures as of fiscal year ending December.

Appendix

Table 1

BICRA summary table

Risk levelExtremely high Very high High Intermediate 1Low Very lowEconomic risk Industry riskBICRA Economic risk Industry risk Economic Economic Credit risk inInstitutionalCompetitiveSystemwideCountry group trend trend resilience imbalancesthe economyframework dynamics funding
Argentina 9	Stable	Negative	EH	VH	EH	H	H	VH
Armenia 8	Positive	Stable	工	一	EH	VH	H	VH
Australia 3	Stable	Positive	VL	H	L	L	L	一
Austria 2	Stable	Stable	VL	L	一			L
Azerbaijan 9	Stable	Stable	VH	工	VH	EH	H	VH
Bahrain 7	Stable	Stable	H	H	VH	一	H	H
Bangladesh 9	Stable	Negative	VH	一	EH	EH	EH	一
Belarus 10	Negative	Stable	EH	H	VH	EH	VH	EH
Belgium 2	Stable	Stable	L	L	L			VL
Bermuda 5	Stable	Stable	一	工	工		L	一
Bolivia 10	Stable	Negative	EH	VH	EH	VH	VH	H
Brazil 6	Stable	Stable	VH	一	工		工	1
Brunei 6	Stable	Stable	一	L	工	EH		L
Cambodia 9	Stable	Stable	VH	H	EH	EH	H	VH
Canada 2	Stable	Stable	VL		一	VL	L	L
Chile 3	Negative	Stable	工	L	一	一	L	L
China 6	Stable	Stable	一	工	VH	工	工	VL
Colombia 6	Stable	Stable	工	工	H	一	一	工
Costa Rica 8	Stable	Stable	H	工	VH	工	EH	工
Cyprus 8	Stable	Positive		H	VH	工	VH	VH
Czech Republic 3	Negative	Stable		L	一			一
Denmark 3	Stable	Stable	VL	L	一			一
Egypt 10	Stable	Stable	EH	VH	VH	EH	H	VH
ElSalvador 9	Negative	Negative	EH	1	EH	H		EH
Finland 2	Stable	Stable	VL	L	L		L	一
France 3	Stable	Stable	L		L		工	L
Georgia 7	Stable	Stable	H		VH		H	VH
Germany 3	Stable	Stable	VL	L	L		工	VL
Greece 7	Stable	Stable	H	H	VH	工	H	H
Guatemala 7	Stable	Stable	EH		VH	工		一
Honduras 8	Stable	Stable	VH		EH	VH		H
Hong Kong 2	Stable	Stable	L			VL	L	VL
Hungary 5	Stable	Stable	一	H			H	一
Iceland 5	Stable	Stable	一	工				H

BICRA summary table (cont’d)

BICRA Economic risk Industry risk				Economic risk			Industry risk Credit risk in Institutional Competitive
Country	group	trend	trend	Economic resilience	Economic imbalances the economy		framework	dynamics	Systemwide funding
India	5	Stable	Stable	工		VH	工	H
Indonesia	6	Stable	Stable	H	L	VH	工	H
Ireland	3	Stable	Stable	L				H
Israel	3	Stable	Stable			L		工	L
Italy	5	Stable	Stable			H		H
Jamaica	8	Stable	Stable	EH		VH	H	VH	VH
Japan	3	Stable	Stable	L	VL			H	VL
Jordan	8	Stable	Stable	EH		VH	工	H	工
Kazakhstan	8	Stable	Stable	工	H	EH	EH	H	工
Korea	3	Stable	Stable	L	L	一	一		L
Kuwait	4	Stable	Stable	H		一	H		L
Liechtenstein	2	Stable	Stable	L	L	L			L
Luxembourg	2	Stable	Stable	VL		L			VL
Malaysia	4	Stable	Stable	H	L	H		H	L
Malta	5	Stable	Stable	一	L	H	H	H
Mexico	5	Stable	Stable	VH
Mongolia	9	Stable	Stable	VH	H	EH	EH	H	VH
Morocco	7	Stable	Stable	VH		VH		H	H
Netherlands	3	Stable	Stable	VL					L
New Zealand	4	Stable	Stable	VL	H	L		L	工
Nigeria	10	Stable	Stable	EH	工	EH	EH	H	VH
Norway	2	Stable	Stable	VL	一	L	L	L	一
Oman	7	Positive	Stable	工	H	H		H	工
Panama	5	Negative	Stable	一	H	L		L	VH
Paraguay	8	Stable	Stable	VH		EH	VH	VH	工
Peru	5	Negative	Stable	H	VL	VH	L
Philippines	5	Stable	Stable	VH	L	H	H
Poland	4	Stable	Stable	H	L		H	工	L
Portugal	5	Positive	Stable	一	H	H		H
Qatar	5	Stable	Stable	L	H	H			VH
Saudi Arabia	4	Stable	Stable	H					L
Singapore	2	Stable	Stable	VL			VL		L
Slovenia	4	Stable	Stable	一					一
South Africa	6	Stable	Stable	VH		H			工
Spain	4	Stable	Stable	一		一		H	L
Sweden	2	Stable	Stable	VL		L		L
Switzerland	2	Stable	Stable	VL	VL	L		L	L
Taiwan	4	Stable	Stable	L				VH	VL
Thailand	7	Stable	Stable	H	H	VH	VH	H

BICRA summary table (cont’d)

Economic risk							Industry risk
Country	group	trend	BICRA Economic risk Industry risk trend	Economic resilience	Economic imbalances	the economy	Credit risk in Institutional( framework	Competitive Systemwide dynamics	funding
Trinidad and Tobago	6	Stable	Stable	VH		VH	H	H	L
Tunisia	10	Stable	Negative	EH	H	EH	EH	H	VH
Turkiye	9	Stable	Stable	VH	VH	VH	VH	VH	VH
u.K	3	Stable	Stable	L	一	H	L	一	L
U.S.	3	Stable	Stable	L	一		一	1	VL
Ukraine	10	Stable	Stable	EH	EH	EH	VH	VH	VH
United Arab Emirates	5	Stable	Stable	L	H	VH	一	工	一
Uruguay	5	Stable	Stable	H	L	H	H	H	一
Uzbekistan	8	Stable	Stable	VH	一	VH	EH	工	VH
Vietnam	9	Stable	Stable	VH	H	EH	EH	VH

Data as of November 15, 2023. Source: S&P Global Ratings.

Interactive Dashboard

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Using the link, compare a banking system with its peers according to geographic region or BICRA group.

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Global Banks Country-By-Country Outlook 2024: Forewarned Is Forearmed