Declining global trade to weigh on EMEA trade-finance banks, Fitch Ratings
The coronavirus pandemic has increased downside risks to EMEA trade-finance banks' (ETFBs) financial profiles, Fitch Ratings says in a new special report. This is due to lower business volumes, weaker revenues, and heightened asset- quality risks, which are likely to increase impairment charges and could erode capital buffers.
The six Fitch-rated ETFBs have varying levels of rating headroom against the deteriorated economic environments but generally adequate capitalisation and sufficient liquidity underpin their ratings.
The coronavirus outbreak has severe implications for global trade given the disruption to supply chains and logistical restrictions from lockdowns, materially lower demand for goods and commodities, and rising operational risks including fraud.
Most rated ETFBs experienced a rise in non-performing assets (including on-and off-balance sheet exposures) between 2018 and 1H20, reflecting deteriorating operating environments and significant event risk from large credit concentrations. Fitch expects asset quality to continue to deteriorate in 2020 as the coronavirus crisis weighs on the credit profiles of borrowers.
In 2019, some of the ETFBs displayed weakening operating profit, mainly due to lower revenues from business-model pressures or higher loan impairment charges. Profitability was also hit by increased country risks in some of the banks' key operating environments, which resulted in credit losses.
Capitalisation is generally acceptable across the rated banks but could come under pressure from significant asset-quality deterioration or a protracted weakening in earnings. At end-2019, capital ratios were moderately above regulatory requirements across the banks.
The funding profiles of trade-finance banks vary and are typically short-term given the maturities of trade-finance activities. Some banks raise most of their funds from their respective majority shareholders, or from related parties, while other banks rely on cost-sensitive bank and customer deposits. At end-2019, all banks generally had reasonable balance-sheet liquidity.
While Fitch expects refinancing of market funding to become more challenging or expensive, monetary policy-support facilities and lower business volumes could partly mitigate funding and liquidity pressures on these banks.