S&P Global Ratings expects credit losses of 1.3 trillion across banking systems

Across the 88 banking systems the S&P Global Ratings covers, S&P forecasts their credit losses will be about USD 1.3 trillion in 2020. Looking at 2020, S&P expects that on a global scale, bank credit cost ratios in 2020 will be around 160 basis points (bps), more than double compared to their 2019 level of 78 bps.

S&P projections for credit losses vary among regions, in size and timing of their recognition. Of the USD 926 billion total increase in credit losses, the agency forecasts over 2020 and 2021, Asia-Pacific accounts for USD 518 billion, dominated by USD 398 billion of losses in China. North America's regions account for a further USD 240 billion of the increase, followed by USD 120 billion in Western Europe.

S&P forecasts credit losses of USD 366 billion over the two years to end-2021 for the US and Canada. For the US, loan loss rates will be about half the roughly 6% level the US Federal Reserve has projected in its nine-quarter severely adverse scenario in its last two annual stress tests. Moreover, in the first quarter of 2020, US FDIC-insured banks reported a USD 53 billion in provisions for credit losses, and some banks have indicated that provisions could be just as high in the quarter ended in June 2020.

According to the report, while major banks will be able to absorb credit losses from earnings, they will be left with sharply reduced headroom for further upticks.