Overview And Scope

This article presents updates to S&P Global Ratings' views on the banking systems that it currently reviews under its Banking Industry Country Risk Assessment (BICRA) methodology. We will typically update this publication on a quarterly basis to summarize the latest developments in our BICRA assessments. The publication includes a chart showing the economic and industry risk scores for the countries where we rate banks "Global BICRA Comparison" (see chart 1). The "Latest BICRA Actions" section summarizes BICRA assessment changes in 2023 and rationales for these actions (see table 1). The report also includes a "BICRA Economic Risk And Industry Risk Scores and Components" section on our views about the key risks and risk trends affecting the banking sectors (see tables 2 and 3). Finally, we display the "Trajectory of BICRA Economic and Industry Risk Trends" (see charts 2 and 3). An appendix includes the "BICRA Related Publications" since the beginning of the year (see table 4).

Global BICRA Comparison

Chart 1

BICRA Related Actions Taken In 2023

Table 1

Rationales For BICRA Related Actions Taken In 2023

Bolivia

In December 2023, we revised our industry risk score for Bolivia to '9' from '8'. We believe pressures on the country's economic growth and fiscal accounts could depress the banking industry's growth and performance, further eating into the already narrow profits due to the government-directed lending and loan-moratorium laws. Government-directed lending, which accounts for at least 60% of total loans, increases market distortions and competition, while exposing banks to cyclical economic sectors, which heighten credit risks and dent profitability.

Cyprus

In December 2023, we revised our BICRA for Cyprus to Group '7' from Group '8' and our industry risk score to '7' from '8'. Cypriot banks have made significant progress toward rebalancing their funding profiles, while further reducing dependence on nonresident depositors. With the aforementioned updates, we have also revised the industry risk trend for Cyprus to stable from positive. We have also revised our economic risk trend for Cyprus to positive from stable. To a large extent, the Cypriot banking system has absorbed the effect of the 2012 financial crisis on asset quality. As the macroeconomic environment normalizes over the next two-to-three years, we expect the cost of risk to moderate.

Greece

In December 2023, we revised our economic risk trend for Greece to positive from stable. After cleaning up about €80 billion of legacy bad assets since 2019, Greek banks are ready to leverage the country's solid growth prospects, resumption of credit demand, improving household and business creditworthiness, recovering property prices, and decreasing unemployment. The remaining legacy bad assets on banks' balance sheets mean substantially lower provisions for banks for the ongoing clean-up, pushing down credit losses to cyclical lows over 2024-2025. We have also revised our industry risk trend for Greece to positive from stable. Decreasing sovereign and financial system risks have boosted investor sentiment and enabled Greek banks to regain access to debt markets abroad, repay targeted longer-term refinancing operations borrowings while remaining liquid, and contain the pass-through of higher rates to customer deposits.

El Salvador

In November 2023, we revised our economic risk trend for El Salvador to stable from negative. This revision is based on our expectation that banks' exposure to sovereign debt won't increase in the next 12-24 months. We think this could mitigate larger impacts on banks' liquidity buffers, their capacity to extend credit to other sectors, and potential damage to their already modest profitability and capitalization metrics. It could also relieve pressure stemming from economic imbalances in the banking system. Salvadoran banks have increased their exposure to government debt since 2020, specifically in short-term bills, to about 8% of the banking system's assets. Nonetheless, we don't expect this exposure to increase in the next 12-24 months. We have also revised our industry risk trend for El Salvador to stable from negative. There is less pressure on the banking system's competitive dynamics and institutional framework due to the low use of bitcoin. As of this report's date, bitcoin adoption in El Salvador's banking system has been low. In our view, industry stability and competitive dynamics could diminish if regulation and controls aren't robust enough to prevent tax evasion and money laundering or to mitigate the banking system's contingent risk related to cybersecurity and bitcoin market volatility.

Iceland

In November 2023, we revised our economic risk trend for Iceland to positive from stable. In our view, the economic risks facing Iceland's banks are receding in tandem with a stabilizing housing market and unwinding private-sector leverage.

Turkiye

In November 2023, we revised our economic risk trend for Turkiye to stable from negative and our industry risk trend to stable from negative. We believe that imbalances and refinancing risks for Turkish banks are somewhat stabilizing thanks to monetary and regulatory policy normalization. In our view, if the new economic team continues gradual policy tightening and removing unorthodox measures, it could rebalance the economy in the medium term. This, together with further simplification of the regulatory framework, may eventually restore the central bank's credibility and reduce pressure on banks' funding. However, risks remain elevated in the short term, especially because Turkiye's balance-of-payments position is still weak. An increase in geopolitical risk or a reversal of the current orthodox policies could be detrimental for financial stability. This may materialize through weaker foreign investor sentiment and lower domestic confidence, pushing back deposit dollarization and putting additional strain on the lira.

Uruguay

In November 2023, we revised our industry risk trend for Uruguay to positive from stable. Steady historical levels of deposits, predictable economic policies, and the enhancement of financial supervision and regulation are reducing the risk of deposit volatility. However, existing structural characteristics, such as a large share of sight deposits and the wholesale funding concentration, are still a source of risk.

Israel

In October 2023, we revised our economic risk trend for Israel to negative from stable. This reflects our view that the Israeli banking system might face higher risks amid increased geopolitical risk. Hamas' attacks and the military operation led by the Israeli army on the Gaza Strip have added significant downside risks to Israel's economic outlook. Our revised baseline assumptions suggest this situation will have the most acute economic impact in fourth-quarter 2023, with an estimated 5% drop in GDP quarter on quarter, and the effects lessening throughout 2024 and a rapid recovery beyond. We acknowledge it is difficult to gauge the scale of the downturn, and we see a high degree of uncertainty about the extent and duration of military hostilities. Moreover, we believe that if the conflict escalates further, it could add significant security risks and have a deeper impact on the domestic economy.

Egypt

In October 2023, we revised our BICRA for Egypt to Group '10' from Group '9' and our economic risk score to '10' from '9'. The lack of progress on key monetary and structural reforms has exacerbated imbalances in the currency market, deteriorating the net foreign asset position of systemic banks and delaying the disbursements of IMF and other multilateral and bilateral financing, which in our view, are critical to cover Egypt's high external funding. In addition, we view the government's high debt servicing costs as a potential challenge to debt sustainability, given rising social pressure, and limited spending capacity after interest payments. With the aforementioned change to the economic risk score, we have also revised our economic risk trend for Egypt to stable from negative. We have also revised our industry risk score for Egypt to '9' from '8'. Banks have increased their reliance on external funding due to the lack of sufficient foreign currency in the economy. Absent Central Bank of Egypt intervention in the market to provide foreign currency liquidity, commercial banks are liquidating foreign assets and increasing borrowing from abroad, at higher costs, to face high demand for foreign currency via official channels from households and companies.

Italy

In October 2023, we revised our economic risk score for Italy to '5' from '6'. We expect Italian banks and, particularly, their asset quality to be more resilient than in the past to future downturns, thanks to improved underwriting, tighter risk controls, and active management of problem loans, paired with historically low legacy nonperforming exposures. With the aforementioned change to the economic risk score, we have also revised our economic risk trend for Italy to stable from positive.

Oman

In October 2023, we revised our economic risk trend for Oman to positive from stable. We see stronger economic resilience for Oman's banking system. Favorable oil sector dynamics, coupled with higher non-hydrocarbon sector output, will likely sustain the country's real economic growth in 2023-2026 and support domestic demand and the performance of key sectors such as tourism, transportation (mainly shipping), and utilities. Structural reforms such as reorganizing Oman's government-related entities have brought operational efficiencies and strengthened the financial profiles of these entities.

Portugal

In September 2023, we revised our economic risk trend for Portugal to positive from stable. This reflects its improving budgetary and external positions. Supported by tourism and investments under large EU funds, as well as prudent policymaking, the government's fiscal policy will see net debt to GDP decline to an expected 87% at the end of 2026 from 107% at the end of 2022--one of the steepest reductions in Europe. At the same time, Portugal's overall external position continues to improve, thanks to contained import growth and booming tourism. We therefore expect the current account balance will return to surplus in 2023, at just over 1% of GDP. We also expect external deleveraging to continue.

Malta

In September 2023, we revised our economic risk trend for Malta to stable from negative. In our opinion, sound economic fundamentals in the country are easing the risks of a sharp real estate price correction for local banks. We anticipate Malta's economy will continue growing in the coming quarters, and that its slowdown in 2023 will be milder than peers' and its rebound more robust in 2024. We expect real GDP growth of over 3% in both 2023 and 2024, versus an average below 1% in the euro area, largely due to tourism and gaming industry resiliency.

Bangladesh

In August 2023, we revised our industry risk trend for Bangladesh to negative from stable. This reflects rising systemwide funding risks for Bangladesh banks, particularly in U.S. dollars, as a result of the country's external position. We will revise our Bangladesh industry risk and BICRA assessment to '10' from '9' if:

• There is sustained pressure on Bangladesh's external position; or
• There is a continued decline in foreign-exchange reserves, resulting in a worsening of its external debt or liquidity metrics leading to widespread foreign currency liquidity shortages and stress in the banking sector.

We will revise the industry risk trend to stable from negative if:

• Bangladesh bolsters its external position, which would likely be indicated by a substantial increase in foreign exchange reserves combined with a modest current account deficit, and healthy growth in current account receipts; or
• Exchange-rate pressure abates, accompanied by improved availability of foreign currency in the interbank market. This is to ensure the financial sector has sufficient access to diversified funding sources to service its U.S. dollar obligations, such as remittances and exporter requirements. Sufficient access would be demonstrated mainly by a reduction in the time banks take to settle foreign currency letters of credit, from the current 10-15 days, as suggested anecdotally.

Switzerland

In July 2023, we revised our economic risk score for Switzerland to '1' from '2'. We expect Swiss households and corporates to maintain credit strength despite the worsening economic outlook. The labor market has been very resilient, with the unemployment rate near 20-year lows (2.2% in 2022), supporting household resilience. At the same time, we consider Swiss corporate balance sheets as healthy overall and do not project a material worsening of their credit metrics, given the high share of equity financing compared with international peers. To date, we have not seen any notable increase in insolvencies due to shocks and deem the sector flexible, competitive, and well positioned to withstand the negative effects of a persistently strong Swiss franc.

We have also revised our industry risk score for Switzerland to '3' from '2'. In May 2023, the Swiss parliament commissioned an inquiry into Swiss Financial Market Supervisory Authority (FINMA) and the Swiss Federal Council to examine the Credit Suisse failure. Following the outcome of the parliamentary commission (expected next year), we believe further legislative changes could ensue, for example related to capital ordinance, FINMA's early intervention powers, the Swiss National Bank's role as lender of last resort, and resolution. While general regulation in Switzerland remains strong, we now regard the Swiss institutional framework as comparable with that of global peers including Austria, Germany, New Zealand, and the U.S.

Hungary

In July 2023, we revised our economic risk trend for Hungary to stable from negative. This reflects that credit losses for the Hungarian banks are likely to be lower than we originally expected, supporting their resilience amid the economic slowdown. Despite rising interest levels and a sharp increase in cost of living stemming from high inflation, we see no material deterioration in households' credit risk. This is largely because of government measures to support the private sector, including small and midsize enterprises. Hungarian banks experienced a slight decline in nonperforming loans to 3.0% in first-quarter 2023 from 3.2% at the end of 2021. Our base-case scenario assumes no material weakening in banks' asset quality.

Poland

In June 2023, we revised our industry risk trend for Poland to stable from negative. Higher interest rates have boosted operating profitability at domestic banks and reinforced their ability to absorb higher costs. The European Court of Justice ruling on June 15, 2023, indicates potentially higher provisioning needs for Polish banks with legacy mortgage loan portfolios denominated in foreign currencies. We expect most banks can absorb these provisioning needs, given their strong operating profitability and available excess capital. Banks would have time to restore their capital positions if needed.

Ireland

In June 2023, we revised our BICRA for Ireland to Group '3' from Group '4', and our economic risk score to 3 from 4. We expect Ireland to enjoy domestic economic growth of about 2.0% in 2023--outperforming many countries in the eurozone--as well as low unemployment, which, in our view, will bolster the Irish banking sector. We also anticipate that Irish banks will be broadly on track to reduce non-performing loans to their publicly stated target levels by year end-2023, and keep asset quality metrics around those levels. Furthermore, we project that the current high interest rate environment--as well as banks' focus on costs and their greater scale thanks to the consolidation of the domestic banking sector--will boost the resilience of domestic banks' overall creditworthiness.

India

In June 2023, we revised our BICRA for India to Group '5' from Group '6', and our economic risk score to 6 from 7. This reflects that a strong recovery is underway in the Indian financial sector. The banking system has unwound imbalances and sharply reduced the high stock of problem assets accumulated during the previous downturn. We expect the system will maintain this good performance. We believe that asset quality will continue to strengthen, benefiting from structural improvements in the operating environment and India's good economic prospects.

Egypt

In May 2023, we revised our economic risk trend for Egypt to negative from stable. We estimate funding needs of about $17 billion for the fiscal year ending June 30, 2023 (fiscal 2023), and $20 billion for fiscal 2024. Lack of sufficient reform implementation has exacerbated pressure on the Egyptian pound and could undermine the timeliness of funding support from multilateral lenders and foreign investors, with negative implications for GDP growth, inflation, and interest rates. In our view, such a scenario could lead to increasing pressure on the domestic banking sector.

New Zealand

In May 2023, we revised our economic risk trend for New Zealand to stable from negative. High interest rates should continue to support the orderly unwinding in property prices in New Zealand. Credit losses over the next two years should revert to their long-term historical average of about 10 basis points despite likely interest rate rises and house price falls.

Italy

In May 2023, we revised our economic risk trend for Italy to positive from stable. This reflects our view that domestic banks in Italy have sharply reduced the high stock of problem assets accumulated in the previous downturn, and significantly reduced imbalances on their balance sheets. We also believe banks have made structural progress in managing the elevated credit risk they are exposed to in comparison with peer banking systems, including high exposures to weaker small and midsize enterprises. This progress can be summarized in better underwriting standards, more proactive management of riskier loans, and more prudent provisioning, all under the supervision and guidance of the European Central Bank. Furthermore, the weakest banks that suffered the most in past recessions are no longer operating after being either liquidated or merged into stronger banks. These factors are likely to make Italian banks' asset quality more resilient to future downturns than in the past.

Cyprus and Greece

In April 2023, we revised our industry risk trend for Cyprus to positive from stable. We revised our BICRA for Greece to Group '7' from Group '8', our industry risk score to '7' from '8', and our industry risk trend to stable from positive. In our view, Cypriot and Greek banks will increasingly reap the benefit from years of balance-sheet cleanup and earnings restoration and now from interest rates hikes, significantly enhancing their loss absorption and capital-building capacities. Banks in these countries have also made significant progress in rebalancing their funding profiles, thanks to strong deposits and sharp balance-sheet deleveraging, which now position them well to repay the large targeted longer-term refinancing operations they have undertaken.

Bolivia

In April 2023, we revised our BICRA for Bolivia to Group '10' from Group '9', and our economic risk score to '10' from '9'. Bolivia's economic risks have amplified during the past several weeks. More specifically, the economy faces higher external vulnerabilities, particularly due to the increasing outflow of dollars in the past two months amid weaker public confidence in the sustainability of the exchange rate regime. Although the banking system has lowered its exposure to foreign currency-denominated loans and deposits in recent years, we still believe the deterioration in the country's external profile could impair the stability of the domestic financial industry. In addition, the slowing economic growth could take a toll on the banks' asset quality during the next few years. We have also revised our government support assessment for Bolivia to uncertain from supportive. This reflects the government's lack of capacity to provide sufficient liquidity to the banking system.

The U.S.

In March 2023, we revised our industry risk trend for the U.S. to stable from positive. This revision follows market volatility in the wake of some recent bank failures, which have shown that challenges can still arise in the banking industry despite many positive changes over the past decade. We view the heightened market volatility as a negative for the banking sector and a reminder of the industry's confidence sensitivity. Significant movements in monetary policy and interest rates have made managing interest rate risk for banks more challenging. Our economists expect the U.S. to have a shallow recession this year, but they also believe the odds of a hard landing have increased. If the economy suffers more than a shallow recession, asset quality in the banking sector could deteriorate and banks could see higher market and credit losses.

Armenia

In March 2023 we revised our economic risk trend for Armenia to positive from stable. Since the Russia-Ukraine conflict began, Armenia has experienced positive spillover in the form of large labor and capital inflows from Russia. This, in turn, has boosted economic growth to double digits (estimated at about 12.6% in real terms in 2022) and narrowed Armenia's persistent twin deficits. We think there is unlikely to be a sharp reversal in financial and labor flows to the country in the next 12 months. Barring extreme scenarios, including a new direct military conflict with Azerbaijan, Armenia's near-term economic growth rate may slow but to a still-robust 4% in 2023. The decline would likely be due to weaker external demand (particularly for tourism), restrictive global financial conditions, and dissipating financial and migrant inflows. At the same time, we expect external and government balance sheets will remain stronger than before. This economic outlook, in our view, will help Armenian banks generate new business and improve asset quality.

Kazakhstan

In March 2023, we revised our BICRA for Kazakhstan to Group '8' from Group '9', and our industry risk score to '8' from '9'. We believe that Kazakhstan's banking industry is demonstrating signs of recovery from a protracted correction following mounted credit losses. This recovery is being supported by favorable commodity prices stimulating credit demand, alongside material improvements in asset quality. Kazakhstani banks benefit from solid margins and have demonstrated capacity to generate earnings to buffer against risks even as the external operating environment has remained uncertain and volatile.

Austria

In February 2023, we revised our industry risk trend for Austria to stable from negative. This reflects our view that pressures on Austrian banks' profitability have moderated. Cost optimization measures and improving revenue have contributed to the development, which we foresee will be sustainable. However, we expect only a marginal further profitability improvement in the medium term, reflecting a weakening economy, high inflationary pressure on operational costs, and increased risk costs. In our view, the sector's return on assets should remain about 0.5% in the medium term. Our base-case scenario does not take into account the tail risks from the secondary effects of the Russia-Ukraine war on Austria's and Europe's economies.

Germany

In February 2023, we revised our economic risk score for Germany to '2' from '1'. This stems from secondary effects from geopolitical factors, including the Russia-Ukraine conflict, continued disruptions in global supply chains, and longer-term risks to Germany's export-oriented manufacturing sector. Recent events have highlighted Germany's reliance on Russian gas and the related vulnerabilities of its export-oriented industrial sector, particularly its energy-intensive heavy industry. At the same time, the banking sector and economy as a whole have been spared from more severe scenarios due to a relatively mild winter curbing energy demand. In addition, the government's efforts to reduce energy dependence on Russia and replace missing gas with increased liquefied natural gas imports have prevented a more severe spike in prices and economic fallout. With this change, we have also revised our economic risk trend for Germany to stable from negative. In our view, the resilience of the German economy provides a meaningful buffer against potential further economic downside. In recent years, German banks have improved their balance-sheet strength and increased their capital cushions compared with those of many European peer banking systems.

Belarus

In January 2023, we revised our economic risk trend for Belarus to negative from stable. We believe banks' asset quality and earnings after provisioning costs could materially weaken, particularly if we see a more severe recession in the Belarusian economy in 2023-2024. This could be caused by international sanctions imposed on Belarus and protracted GDP contraction in Russia—Belarus' key trading partner. We estimate that Belarus experienced a sharp contraction of 4.5% in 2022, and we expect a further contraction of 2% in 2023. This reflects the protracted political crisis, and pressure on key export sectors and the financial sector due to international sanctions imposed in response to Belarus' involvement in the ongoing Russia-Ukraine conflict. Also, this is due to a GDP contraction in Russia, Belarus' main trading partner and its source of financial support over the past years. We forecast that pressure on Russian GDP will continue to intensify owing to the increasing scope of international sanctions and related supply chain disruptions. All these factors will weaken domestic investor and consumer confidence, impair the banking sector's stability, and likely eventually increase nonperforming loans and the cost of risk for Belarus' banking system.

BICRA Economic Risk And Industry Risk Scores and Components

The table below presents S&P Global Ratings' views about the key risks and risk trends affecting the banking sectors where we rate banks. For more detailed information, please refer to the latest BICRA on a given country. According to our methodology, BICRAs fall into groups from '1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10').

Table 2

Table 3

Trajectory Of BICRA Economic And Industry Risk Trends

Chart 2

Chart 3

Appendix

Table 4

Related Criteria

• Banking Industry Country Risk Assessment Update: December 2023, Dec. 20, 2023
• Financial Institutions Rating Methodology , Dec. 9, 2021, Dec. 9, 2021
• Sovereign Rating Methodology , Dec. 18, 2017
• Risk-Adjusted Capital Framework Methodology , July 20, 2017
• Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021