Fitch Ratings believes Japan’s already challenged banking industry will be further stung by lasting economic scars from the coronavirus pandemic.
The economic contraction in 2020 was an unwelcome obstacle to the country’s goal of reflating its economy, as is the downside risk posed to its recovery in 2021.
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“Negative Outlook on Operating Environment We revised our outlook on Japanese banks’ ‘a-‘ operating environment midpoint to negative, from stable, in early 2020 to account for the deep global economic shock from the pandemic,” the rating agency said.
Fitch’s assessment of banks’ standalone credit profiles “reflected our forecast of a drop in profitability, mainly from higher credit costs in the domestic and overseas markets.”
The Fitch researchers expect continued economic stress to exert further pressure on banks’ operating environment and do not expect to revise the outlook to stable in the near-term.
“Profitability will continue to suffer”
This is despite the agency’s forecast of a mild recovery in the domestic economy during 2021. “We believe bank profitability will continue to suffer under Japan’s sustained negative interest-rate policy and low interest rates globally,” Fitch noted.
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By GlobalDataRatings Sensitive to Operating Environment
“The Viability Ratings of Japan’s major banking groups are highly sensitive to our assessment of the operating environment,” Fitch said.
The rating agency sees this environment as “hampering banks’ sound asset quality and ability to achieve sustainable profitability and a steady improvement in capitalisation.”
Banks are bracing for the bumpy road
Last November, Japan’s biggest banks warned of a bleaker outlook for the next six months as the resurgent pandemic slams economies, even as they reported first-half profits that exceeded expectations.
Stimulus measures taken by governments and central banks at home and abroad have helped to curtail an increase in bad-loan costs.
Yet with the Covid-19 pandemic persisting, the risk is that the crisis will continue. Companies and households will be less able to repay their debts once the relief wears off.
