The UK’s vote for Brexit, Donald Trump’s US election win and a slowdown in Chinese economic growth are combining to create significant risks for the global banking sector, a leading ratings agency warned on Wednesday.
Standard & Poor’s also included the low interest rate environment as posing potential hurdles for the banking industry’s creditworthiness in its global credit outlook for the sector in 2017.
More than half of the largest global banking systems face negative pressure, S&P said, with more banks in Latin America and Asia Pacific appearing on the watch list. The UK is among 11 of the 20 largest global banking markets facing negative pressure.
S&P said: “Weaker prospects for earnings growth globally, potential risks related to the UK’s referendum vote to leave the EU, and more generally increased political risks are constraining factors for bank ratings in 2017.”
It added: “A key constraint in our global credit outlook for banks relates to the path of the global economy, which is marked by a sluggish global growth underpinned by China’s rebalancing, the adjustment of commodity exporters to new commodity prices, demographic factors inducing lower productivity growth and geopolitical and political uncertainty.”
Of the 85 banking systems assessed, 42% faced negative trends.
The ratings agency said there were signs of “renewed tremors” from the result of the UK’s EU referendum on 23 June while the election of Trump as US president showed that political risk remained significant. Some believe Trump could prove helpful for the banking sector, while the US stock market is at record highs on expectations that he will boost spending on the economy.
“The policies of President-elect Trump’s administration could represent the largest wildcard with the potential, at least over time, to meaningfully affect regulation, economic growth, interest rates, and ultimately bank performance,” S&P said.
There could be knock-on effects in other parts of the world as a result, particularly in France and Germany, which are holding elections in 2017.
“Brexit may have energised broader, populist trends already pulsating through Europe. Citizens of other EU member states have expressed interest in holding referendums of their own to exit the union. Increasing populist sentiment, especially after the results of the US elections, also points to a shifting political landscape in the world’s largest economies,” S&P said.
This week Angela Merkel said she would run for a fourth term as German chancellor in next September’s elections. In France polls show that the Front National leader, Marine Le Pen, will make it to the French presidential final round runoff next May, while the former French president Nicolas Sarkozy has failed to be chosen as the rightwing Les Républicains party’s candidate for the presidency.
The former PMs François Fillon and Alain Juppé now face a second vote on 27 November to decide who will go up against Le Pen as the party’s candidate.
Anti-globalisation movements could affect growth prospects and S&P is operating on the assumption that 2017 will be a year of sluggish growth across most developed and emerging markets. The European Central Bank could adopt a more relaxed approach to monetary policy while the US Federal Reserve could start to increase rates by a quarter percentage point in December and a half point in 2017.
