Downgrades of financial institutions’ (FI) ratings accelerated in 3Q22, mainly due to emerging-market sovereign downgrades and deteriorating global economic conditions, Fitch Ratings says in a new report.

We expect continued negative rating actions to in the coming quarters as the effects of high inflation and likely recessions in developed markets put pressure on many FIs’ financial profiles.

Downgrades accounted for 14% of the 366 rating actions on global FIs in 3Q22, significantly outnumbering upgrades (less than 5%). However, positive and negative actions overall were more balanced (15% and 14%, respectively) as the number of positive actions was boosted by upward Outlook revisions. About 70% of rating actions led to unchanged ratings and Outlooks.

About 60% of the FI rating changes were triggered by sovereign rating actions. Turkiye’s downgrade to ‘B’/Negative from ‘B+’/Negative in July drove two-thirds of the negative actions, whilst Brazil’s Outlook stabilisation explained about 30% of the positive actions.

Non-sovereign-driven negative actions included the downgrades of two Polish banks following the government’s introduction of payment holidays on local-currency residential mortgages, which imposes large costs on banks. We also downgraded two Mexican non-bank financial institutions (NBFIs) due to refinancing risk as investor appetite for Mexican NBFI debt weakened. Valuation declines and elevated leverage led to negative actions on two traditional investment managers, while the potential downturn in the US residential and commercial real-estate markets led us to lower the Outlooks on three US title insurers to Stable from Positive.

Non-sovereign-driven positive actions generally reflected improved risk profiles through lower impaired loans, tightened underwriting standards or reduced liquidity risk. Resilient profitability, often due to higher interest rates, was also a factor.