3/3/17: Sovereign & Corporate Credit Ratings: Slow Motion Disaster Spectacle

Recently, I wrote about the latest Fitch Ratings data showing a dramatic decline in the number of AAA-rated sovereigns over 2016 (see: http://trueeconomics.blogspot.com/2017/02/10217-sovereign-debt-bubble-methane.html). Now, take a look at the Fitch's latest analysis of the trends in A and better rated sovereigns:

Per Fitch: "The proportion of 'A-' and higher ratings in Fitch's global portfolio of sovereigns, corporates and banks remains well below the pre financial-crisis level and could fall further over the next couple of years as the balance of ratings outlooks has deteriorated."

Some numbers:

• In sovereign ratings, the proportion of 'AAA' sovereigns was down to below 10% at the end of 2016, marking its lowest-ever level. "Around 36% of the portfolio is rated in the 'A' to 'AAA' categories, down from 48% at the end of 2006 while 27% is rated 'B+' or below, compared to 20% in 2006."
• Fitch's sovereign ratings also "have the greatest share of negative outlooks on a net basis, at 21%. This suggests downgrades could outnumber upgrades by a wide margin" going forward.
• In corporate ratings, "the proportion of corporate ratings in the 'A' to 'AAA' categories has dropped to 20% from 30% over the last decade, but unlike sovereigns the proportion rated 'B+' and below has only ticked up by 1 percentage point. Instead ratings have become increasingly compressed in the 'BB' and 'BBB' categories."
• "Financial institutions, which have historically had a bigger share of high investment grade ratings, have seen the proportion of 'A' to 'AAA' category ratings slip to 39% from 53%."
• "The trend seems set to worsen, as a net 11% of financial institution ratings outlooks were negative at end-2016, driven largely by outlooks on emerging-market banks, which themselves often reflect the outlooks of their sovereign."

13/11/15: Fitch Survey of European Investors' Outlook

Fitch survey of European credit investors shows that “the risk posed over the next 12 months by adverse developments in one or more emerging markets was high” at 59% up from 45% in previous survey in July. European investors continue to see EMs as the key drivers of downside fundamentals risks for 2016, with 3/4rs (80%) of all respondents saying EMs sovereign (corporate) fundamentals are likely to deteriorate in 2016 compared to 2/3rds (60%) in July survey. Some more details:

• 29% of respondents see low commodity prices as the main risk to EMs, 
• 26% see the key driver as slower global growth, 
• 24% are expecting a Fed rate rise to be a key trigger for EMs risks amplification, and 
• 21% cite high debt levels as the main driver. 

Fitch global growth forecast of 2.3% for 2015. Table below supplies IMF forecasts and historical comparatives:

Strangely enough, much of this focus on the EMs for European investors is probably down to the European economy having settled into what appears to be its 'new normal' of around 1.2-1.4% growth pattern - sluggish, predictable and non-threatening, thereby shifting focus for risk assessments elsewhere.

11/4/15: One Number Busts Greek 'Internal Devaluation Can Work' Myth

An interesting note from the Fitch on the likelihood of success for Greek 'bad bank' set up here.

Neat summary of the problem: "NPLs have reached staggeringly high levels. Fitch estimates that domestic NPLs at National Bank of Greece, Piraeus Bank, Eurobank Ergasias and Alpha Bank (which together account for around 95% of sector assets) reached EUR72bn at end-2014, equivalent to 35% of combined domestic loans. Net of reserves, Greek NPLs reached a high EUR30bn and still exceeded the banks' combined equity."

NPLs at 35% of all domestic loans... and someone still believes Greece can just do that external devaluation thingy?..

7/3/15: Fitch on Russian Banks: January data

Earlier this week, Fitch Ratings published 'Russian Banks Datawatch', covering banks' balance sheet data as of 1 February 2015. Fitch Ratings noted the following key developments in January:

• "Corporate loans increased by RUB2.2trn (6.5%) in nominal terms in January", down -0.9% "after adjusting for 23% rouble depreciation against the US dollar"
• "Retail lending dropped by a moderate RUB46bn (-0.4%) in nominal terms", but fell -1.1% in USD terms. Majority of banks are deleveraging at a rate of 1-4%
• "Customer funding grew by RUB3.5trn (8.2%) in nominal terms", down only -0.1% "net of currency valuation effects as RUB328bn outflow from retail accounts was only partially compensated by RUB264bn inflow of corporate (excluding government entities) funding"
• CBR funding: "Banks repaid about RUB1trn of state funding in January, which had become expensive after the Central Bank of Russia (CBR) increased the key interest rate to 17% from 11.5% in December 2014 (before cutting it slightly to 15% in February 2015)". Note: these repayments offset official forex outflows recorded in the months when banks borrowed funds. As a reminder, when a bank borrows in forex from the CBR, the borrowing is recorded as forex outflow. When the bank subsequently repays the funds in forex, the repayment is entered as forex inflow. But if the bank repays borrowings in RUB, the repayment is registered as an inflow in RUB.
• Actual CBR funding deleveraging by the banks was even steeper: Banks repayment of RUB1trn is broken down into (1) "RUB1.6trn decrease of CBR funding" offset by (2) "RUB0.6trn increase in deposits from the Ministry of Finance, regional and federal budgets". Note: as deposits are liabilities, higher holdings of official deposits within the CBR account counts against the CBR balance sheet.
• Fitch notes that going forward, "This trend [of net repayment of CBR loans] is likely to continue unless the CBR lowers the key rate further ...CBR funding of the sector in foreign currency has become significant, totalling USD21bn (of which USD9.5bn was provided to Otkrytie) at 1 February 2015".
• Banks' profitability: "The sector reported a RUB34bn net loss in January (-6.2% annualised ROE). Alfa-bank significantly outperformed the sector with a net income of RUB30bn mainly due to FX-revaluation gains. Among state banks only Sberbank reported net income, at RUB3.7bn, while others were loss-making: VTB group had a loss of RUB21bn, Gazprombank RUB8bn and Russian Agricultural Bank RUB4bn. Retail banks performed poorly, and most were loss-making..."
• Banks capital ratios: "The average total capital ratio (10% required minimum) of the 100 sample banks decreased by 54bps in January. As at end-1M15, seven banks in the sample (of those publishing capital ratios) had a total capital ratio below 11% [one of them] Fondservisbank (10.4%), was put under CBR temporary administration in February."
• Capitalisation forward: "The announced state recapitalisation measures of over RUB2trn should moderately support banks' capitalisation, although these will be available primarily for larger banks" In other words, expect push for more banks consolidations from Q2 2015.

Summary: corporate lending is up in RUB terms but down in USD terms, retail lending is down both in RUB and USD terms. Deposits up in RUB terms and flat in USD terms, Profitability down significantly and the sector is generating net losses. Capitalisation down with a number of smaller banks heading closer to regulatory minimum, implying that recapitalisation funds will have to be used pretty soon and sector conslidation is likely to accelerate.

17/1/2015: Russia is not Greece...

On foot of sovereign downgrade of Russian debt back on January 10, Fitch cut ratings for some Russian regions and banks last night.

Here's Interfax link to banks downgrades: http://www.interfax.ru/business/418387 and regional ratings downgrades: http://www.interfax.ru/business/418377.

Note: Moody's also issued a sovereigns bet downgrade for Russia - details here: http://trueeconomics.blogspot.ie/2015/01/1612015-moodys-get-double-moody-on.html

Meanwhile, another downgrade is coming - S&P said yesterday that it will review Russian ratings before the end of January. Interfax report here: http://www.interfax.ru/business/418357

The season of 'Get Russia' continues. With uninterrupted success… oh yes, the dim sum markets will be fun in 2015.

Note: I must say I have not seen such rapid fire downgrading any time in my memory, with exception of Greece and Cyprus where, in both cases, the ratings agencies were literally racing each other and themselves to catch up with the reality.

14/5/2014: Puff... and in a second few mortgages arrears were gone...

Irish Times covered Fitch report today that shows that for mortgages tracked by the agency as a part of 12 residential MBS (RMBS) packages posted another rise in arrears. In 2013 the 90-days in arrears mortgages accounted for 16.7% of total tracked by Fitch. In Q1 2014 this rose to 18.4%.

Irish Times article is available here: http://www.irishtimes.com/business/economy/irish-mortgage-arrears-continuing-to-accelerate-says-fitch-1.1795586

The article notes that Central Bank data showed decline in mortgages in arrears in the most recent 3 months period covered by Central Bank data. Alas, there is a caveat: in Q4 2013 data - the most current reported by the Central Bank, the authorities have omitted mortgages sold by the IBRC to private funds. Adding these mortgages back into the equation and applying the latest known arrears data on the IBRC brings the proportion of all mortgages in arrears 90 days and over for Q4 2013 closer to 13.04% which is above Q3 2013 reading of 12.9%.

Mystery of the declining arrears might just be the successful shifting of mortgages from the books of the entities regulated by the Central Bank to the vultures. In other words...

"The greatest trick the Devil ever pulled was convincing the world he didn't exist"

14/7/2013: French downgrade: it really is very simple...

Here's why France been downgraded last week and why it's outlook is stable:

The chart shows pretty clearly that over the last three years, outlook for the French economy has deteriorated and deteriorated just a notch faster than that for the Euro area. In other words, France - expected to outperform Euro area by 150 bps on real growth in April 2010 is now expected to outperform euro area by 45 bps. Meanwhile, relative to the world growth forecasts, if France was expected to grow at a rate that was around 45% of the world growth rate forecast back in April 2010, today it is expected to grow - on a cumulated basis between 2012 and 2015 - at the rate that is just 13% of the world rate.

It really all is that simple: France is basically priced as Euro area and Euro area is not warranting a AAA risk rating.

10/6/2013: Fitch on Irish Banks

Both Fitch and S&P have in the recent past questioned the model of Irish banking sector crisis resolution on the foot of the apparent link between the banks balance sheets and the exchequer.

Today, Fitch issued another report on Irish banking sector, titled "Peer Review: Irish Banks"

The report claims that Irish banks' current ratings "are constrained by the significant risks that remain in the Irish banking system. However, support remains an important rating driver and Fitch considers that the Irish authorities' propensity to support the 'pillar' banks, Bank of Ireland (BOI) and Allied Irish Banks, p.l.c. (AIB) remains undiminished, despite the withdrawal of the Irish Bank Eligible Liabilities Guarantee (ELG) in March 2013."

Crucially, "Fitch believes that the pillar banks' performance will continue to track within the stress case scenario of the 2011 Prudential Capital Assessment Reviews (PCAR), however these tests were framed on a Basel II basis. Since then capital expectations of market participants have increased. The 2014 PCAR may revise the stress assumptions and requirements to align more closely with Basel III." The kicker is that the banks will need new capital ('might need' another state injection as opposed to 'will need' capital).

"As Irish banks' capital ratios continue to be eroded and a return to profitability only appears feasible in the longer term, the banks may need to raise additional capital before they can contemplate a future independent of state support", Denzil De Bie, a Director in Fitch's Financial Institutions Group told Reuters.

The old kicker is that assets and capital held by the Irish banks remain weak, "with high NPLs and impairment charges, especially against commercial real estate and residential mortgage loans. Although the rate of deterioration slowed at BOI and AIB in 2012, Fitch believes impairment charges could increase during 2013 and 2014, with arrears reaching a peak in 2014, as the banks accelerate the resolution of mortgage arrears in line with new targets set by the Central Bank of Ireland in March 2013."

"Asset quality is weak in the Irish banks, with NPL ratios of 16%-40% in the Fitch-rated
institutions at end-2012. The banks also report a significant portion of their loan book to be past
due but not impaired."

Peaking of mortgages arrears per PCAR2011 starts in 2014 and goes on in 2016-2017.

"Underlying pre-provision operating profitability is structurally very weak because of the long-term, very low-yielding mortgage loans in their books. Until rates rise, Fitch considers that a return to sustainability will only be possible as the various restructuring and cost control plans of the banks begin to yield results. Fitch expects a return to operating profitability to be delayed until at least 2015 because of the continued erosion of earnings from high but reducing impairment charges."

Now, recall that per PCAR2011, Irish banks were supposed to fund their full losses out of operating profits starting with 2015. So far, Fitch is not saying there is excess (above PCAR2011 stress test assumptions) level of stress in the system, but Fitch does seem to point to the already recognised two pressure points:
- continued deterioration on the assets quality side, and
- Basel III.

And the banks are still dependent (and will remain for some time to come) on state/central bank supports: "with loan/deposit ratios still at a high 130%-230% in the Fitch-rated banks at end-2012, wholesale, government and European Central Bank funding still forms an important, albeit reducing, component of the Irish banks‟ funding bases." Why? Because deleveraging is by far not complete:

On banks doing their bit to get credit flowing to the economy:

And per stabilisation of deposits: