Fitch publishes heat map of global financial institutions’ rating vulnerabilities

Fitch Ratings has published a ‘heat map’ assessing the rating vulnerabilities of global financial institutions (FIs) during a coronavirus downside scenario in a recent report.

In the report, Fitch assigns vulnerability scores to the major FI sub-sectors to show their potential sensitivity to a severe coronavirus downside scenario. The scenario is only used to test rating sensitivities that Fitch publishes in rating action commentaries, and is not a reflection of its current rating expectations. The downside scenario includes a prolonged health crisis resulting in depressed consumer demand and a prolonged period of below-trend economic activity that delays any meaningful recovery to beyond 2021.

The report shows rating vulnerability scores under the downside scenario for each sub-sector on a scale from one (virtually no impact, no rating changes) to five (high impact, most or all ratings negatively affected). The sub-sectors in different regions are based on the FI portfolio segmentation in Fitch’s cross-sector heat map, which comprises banks of varying sizes and a variety of non-bank FIs, insurance and funds and asset management sub-sectors.

The majority of FI sectors in North America, EMEA, APAC and LATAM are assigned a score of three (medium impact) and four (medium to high impact), due to the prolonged nature and severity of the downside scenario. Heavy Outlook and Rating Watch activity are probable for about 77 per cent of FI issuers, as well as numerous ratings changes.

Rating downgrades are viewed as most likely under a score of five, which is assigned to larger LATAM banks, European global trading and universal banks, aircraft lessors globally and US- and APAC-based private-equity collateralised fund obligations. LATAM emerges as the most vulnerable region, due to the large number of LATAM sovereigns with negative outlooks, which are therefore exposed to further potential negative sovereign actions.

Fitch is continuously updating its assumptions and ratings under the central baseline scenario, with special reports issued that summarise the key regional rating actions taken. The baseline scenario assumes a short but severe global recession with recovery starting in 3Q20 as the coronavirus crisis subsides.