This article presents updates to S&P Global Ratings' views on the 86 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

On Dec. 9, 2021, S&P Global Ratings published its revised criteria for rating financial institutions and for determining a BICRA, "Financial Institutions Rating Methodology" and "Banking Industry Country Risk Assessment Methodology And Assumptions." The BICRA changes don't alter the fundamentals of the existing analytical framework (please read "Financial Institutions And BICRA Criteria Published," Dec. 9, 2021). These criteria are effective Dec. 9, 2021, except in jurisdictions that require local registration. In those jurisdictions, the criteria are effective only after the local registration process is completed.

Since we last published this report on Nov. 23, 2021, we have revised:

Andorra:

• Our economic risk score to '6' from '5';

Chile:

• Our institutional framework sub-score to intermediate from low, and our competitive dynamics sub-score to low from intermediate; and

Turkey:

• Our economic risk trend to negative from stable, and our industry risk trend to negative from stable.

Andorra

We have revised our economic risk score for Andorra's BICRA estimate to '6' from '5'. Upon implementation of our revised BICRA criteria, we believe this better captures the comparatively higher vulnerability of the country's economy, given its largely concentrated nature and lack of monetary policy flexibility. Andorra benefits from high per capita GDP (US$41,900 at year-end 2021), but the overall size of its economy is fairly small (about US$3 billion). Activity is largely concentrated in financial services, tourism, and commerce, which makes it inherently more vulnerable, as proven during the pandemic when GDP contracted by 12% in 2020. The lack of an independent monetary authority adds additional challenges, as it limits the country's policy options during a crisis.

Chile

We are keeping the BICRA of Chile at group '3', with economic and industry risk scores and trends unchanged after revising our BICRA criteria. However, we have revised the institutional framework sub-score to intermediate from low, and the competitive dynamics sub-score to low from intermediate. We aligned the institutional framework for Chile with that of many global peers, reflecting the fact that the regulator in the country closely monitors financial institutions, imposes good market discipline, and understands newer emerging risks, with some gap in the implementation of standards and supervision. At the same time, we consider the industry to have competitive dynamics that allow the system to have good levels of risk-adjusted profitability. Also, digitalization initiatives are mainly concentrated among existing financial entities in the country, which helps ensure an adequate dynamic.

Turkey

We have revised our economic risk trend for Turkey to negative from stable. This reflects that asset quality could deteriorate beyond our expectations, raising questions about some banks' solvency. We expect that, following years of credit stimulus, loan growth will slightly decelerate over 2022-2023 and asset quality will deteriorate as forbearance measures on loans classification are gradually lifted and the lira's depreciation further strains Turkish corporate borrowers' ability to repay foreign currency-denominated debt. We forecast nonperforming loans (NPLs) will exceed 10% of total loans by 2022, up from 3.5% as of Nov. 30, 2021, and credit losses will increase to 330 basis points (bps) on average in 2022-2023 from 158 bps on Oct. 31, 2021. Further weakening of the lira could result in higher NPLs and credit losses that go beyond our current expectations. At the same time, Turkish banks' risk-weighted assets will keep inflating, further eroding banks' capital ratios. We consider state banks to be the most vulnerable, given their already tight capital buffers, after contributing actively to lending growth over the past few years. The persistence of inflation and continuous political pressure to cut the policy rate also raise questions about Turkey's economic resilience.

We have also revised our industry risk trend for Turkey to negative from stable. Rising inflation and the weakening lira increase refinancing risks for Turkish banks. The banks are highly vulnerable to negative market sentiment and risk aversion because of their structurally high reliance on short-term external funding. On Sept. 30, 2021, they had $83.2 billion of external debt to roll over by October 2022, including about $30 billion of non-resident deposits. Despite market volatility, Turkish banks were able to roll over all their syndicated loans at an attractive price during October and November this year. Under our base-case scenario, we still expect banks to be able to roll over most of their external financing, but at a higher cost because of increased pressure on the Turkish lira and expected monetary policy tightening in developed markets. However, refinancing risks are rising, in our view, since investors' appetite could shift if unorthodox monetary policy persists. Although Turkish banks have sufficient foreign currency liquidity to handle lower rollover rates, most of it is either with the central bank or placed in government securities, which reduces its availability in a highly stressed scenario. We also consider risks of further dollarization to be elevated, especially if domestic residents' confidence in the local currency continues to erode. However, we don't expect Turkey to impose capital controls because we don't currently anticipate significant deposit withdrawals from the banking system.

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 incorporates the entire country's financial system, taking into account the impact of entities other than banks on the financial system. It also looks at the conditions under which rated and unrated entities operate.

Our analysis of economic risk of a banking sector takes into account the structure, performance, and stability of the country's economy, actual or potential imbalances in the economy, and the credit risk stemming from economic participants, mainly households and enterprises.

Our view of industry risk factors in the quality, effectiveness, and track record of bank regulation and supervision, as well as the competitive environment of a country's banking industry, including its risk appetite, structure, risk-adjusted financial performance, and possible distortions in the market. Industry risk also addresses the variety 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 "Financial Institutions Rating Methodology," published on Dec. 9, 2021).

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.

Related criteria

• Financial Institutions Rating Methodology, Dec. 9, 2021
• Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
• 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

• Outlooks On Turkish Banks Now Negative On Increasing Economic And Funding Risks, Dec. 15, 2021
• Global Banks Outlook 2022: Back On Course, Dec. 14, 2021
• Banking Industry Country Risk Assessment: United Kingdom, Dec. 9, 2021
• Banking Industry Country Risk Assessment: Indonesia, Dec. 7, 2021
• Banking Industry Country Risk Assessment: Canada, Dec. 2, 2021
• Banking Industry Country Risk Assessment: Sweden, Dec. 2, 2021
• Banking Industry Country Risk Assessment: Kazakhstan, Dec. 2, 2021
• Banking Industry Country Risk Assessment: Nigeria, Nov. 30, 2021
• Banking Industry Country Risk Assessment: Poland, Nov. 29, 2021
• Global Banking Country Outlook Midyear 2021: Tantalizing Signs Of Stability, July 22, 2021
• Global Banks Outlook Midyear 2021: Clawing Back To Normalcy, July 22, 2021
• 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