This article presents updates to S&P Global Ratings' views on the 88 banking systems that it currently reviews under its Banking Industry Country Risk Assessment (BICRA) methodology (see the chart below and the tables that follow). We also present government support assessments, as well as economic and industry risk trends, for those banking systems.

Latest BICRA Actions And Reports

Since we last published this report on May 27, 2020, we have revised:

Costa Rica:

• Our BICRA to Group '8' from Group '7', and our industry risk score to '8' from '7';

India:

• Our BICRA to Group '6' from Group '5', our economic risk score to '7' from '6', and our economic risk trend to stable from negative; and

New Zealand:

• Our economic risk trend to negative from stable.

Costa Rica

We have revised our BICRA for Costa Rica to Group '8' from Group '7', and our industry risk score to '8' from '7'. For the past couple of years, we have observed a steady decline in the Costa Rican banking system's profitability. The impact of COVID-19 will exacerbate this trend, in our view. Interest rates declining to historically low levels are ratcheting up pressure on net interest margins and active lending rates for core banking products. This, coupled with the market distortion stemming from the preponderant market share of government-owned banks and highly dollarized balance sheets, is taking a huge toll on revenues. At the same time, loan-loss provisions and credit losses will increase as the pandemic crimps the economy and banks' overall financial profile.

India

We have revised our BICRA for India to Group '6' from Group '5', and our economic risk score to '7' from '6'. We believe risks stemming from challenging operating conditions caused by the COVID-19 pandemic have increased for Indian banks. Drastic efforts to curtail the spread of the coronavirus have resulted in a sharp economic contraction. The government's stimulus package, with a headline amount of 10% of GDP, has about 1.2% of direct stimulus measures, which is low relative to that of countries with similar economic impacts from the pandemic. The remaining 8.8% of the package includes liquidity support measures and credit guarantees that will not directly support growth. We now forecast a 5.0% contraction in the economy in fiscal 2021. We anticipate Indian banks' asset quality will deteriorate, credit costs will rise, and profitability will decline over the next 12-24 months.

We have also revised our economic risk trend for India to stable from negative. This is because we expect the country's economy will recover following the containment of the pandemic. We forecast that the economy will achieve a strong recovery following the deep contraction this year, with real GDP growth at 8.5% in fiscal 2022. The economy's long-term outperformance highlights its resilience. India's wide range of structural trends, including healthy demographics and competitive unit labor costs, works in its favor. Therefore, the banking system's nonperforming loans and credit costs will start to reduce gradually.

New Zealand

We have revised our economic risk trend for New Zealand to negative from stable. We consider that there is a one-in-three likelihood in the next two years that we assess the economic risk score as having worsened by one category within our BICRA for New Zealand. This could occur if we foresee the economic downturn--or its impact on the banking sector--becoming significantly more prolonged or severe than our current forecasts. For example, if we consider that credit losses are likely to rise substantially above our current forecasts, or if we see indications of structural weaknesses in the credit risks in the economy such as the financial strength of the corporate sector or underwriting standards followed by the banks, we could revise downward the economic risk score.

About BICRAs

The strengths and weaknesses of an economy and banking industry are critical factors that underpin the creditworthiness of a country's financial institutions. We distill this analysis into a single BICRA, "designed to evaluate and compare global banking systems," as stated in our criteria. 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'). The BICRA methodology has two main analytical components: "economic risk" and "industry risk."

A BICRA analysis for a country covers all of its financial institutions that take deposits, extend credit, or engage in both activities, whether we rate them or not. In addition, the analysis considers the relationship of the banking industry to the financial system, and furthermore to its sovereign. For that reason, many of the factors underlying a sovereign rating are important in determining a BICRA.

Our analysis of economic risk of a banking sector takes into account the structure and stability of the country's economy, including the central government's macroeconomic policy flexibility; actual or potential economic imbalances; and the credit risk of economic participants--mainly households and enterprises.

Our view of industry risk factors in the quality and effectiveness of bank regulation and the track record of authorities in reducing vulnerability to financial crises, as well as the competitive environment of a country's banking industry--including the industry's risk appetite, structure, and performance--and possible distortions in the market. Industry risk also addresses the range and stability of funding options available to banks, including the role of the central bank and government.

Part of our review involves an evaluation of governments' tendency to support private banks in countries where we assign BICRAs. Our view of the likelihood of government support may influence our issuer credit rating on systemically important banks in a particular country, according to our criteria (see "Banks: Rating Methodology And Assumptions," published on Nov. 9, 2011).

Latest BICRAs, Components, And Related Assessments

Table 1

Table 2

Table 3

Chart 1a

Chart 2a

BICRA Estimates And Regional Averages

We determine BICRAs for all countries where rated banks are domiciled, but many rated banks have exposures to countries and banking systems with no rated banks. If the aggregate credit exposures to these countries and banking systems where we do not have BICRAs are significant, or if we otherwise determine them to be relevant to our analysis, we perform a standard but simplified BICRA analysis for the purpose of computing risk-adjusted capital ratios (we call these BICRA Estimates). If rated banks' aggregate exposure is not significant, we use a BICRA proxy for the same purpose based on our foreign currency sovereign rating on the jurisdiction (we call these BICRA Proxies). The BICRA Regional Averages calculate the BICRA Group and Economic Risk score, based on the countries within each region, weighted by GDP. (For more information, please see paragraph 12 of Risk-Adjusted Capital Framework Methodology, published July 20, 2017.)

Table 4

Related Criteria And Research

For a fuller understanding of our revised framework for rating banks, including the BICRA methodology, the bank criteria, and other relevant publications, please see the following articles published on RatingsDirect.

Related criteria

• Sovereign Government Rating Methodology And Assumptions, Dec. 23, 2014
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011

Related research

• Axis Bank Downgraded On Worsening Operating Conditions; Indian Bank On CreditWatch Negative; BICRA Lowered To Group '6', June 26, 2020
• Banking Industry Country Risk Assessment: Turkey, June 23, 2020
• Banking Industry Country Risk Assessment: Taiwan, June 23, 2020
• Banking Industry Country Risk Assessment: Brazil, June 22, 2020
• New Zealand Bank Ratings Can Withstand Rising Economic Risks, Multifold Rise In Credit Losses, June 22, 2020
• Banking Industry Country Risk Assessment: Armenia, June 19, 2020
• Banking Industry Country Risk Assessment: Spain, June 18, 2020
• Banking Industry Country Risk Assessment: Philippines, June 18, 2020
• Banking Industry Country Risk Assessment: Austria, June 17, 2020
• Banking Industry Country Risk Assessment: Tunisia, June 12, 2020
• Two Costa Rican State-Owned Banks Downgraded To 'B' From 'B+' On Similar Action On Sovereign; Outlook Still Negative, June 12, 2020
• Banking Industry Country Risk Assessment: Korea, June 1, 2020
• Global Outlook: Banks Can Largely Fend Off Tougher 2020, Nov. 18, 2019
• S&P To Publish Economic And Industry Risk Trends For Banks, March 12, 2013
• Analytical Linkages Between Sovereign And Bank Ratings, Dec. 6, 2011
• S&P's BICRAs Measure Banking Risks For 86 Countries, Nov. 9, 2011
• The Evolving Landscape For Banks Requires A Robust Analytical Framework, Nov. 1, 2011