Nov. 18, 2019

Emmanuel Volland Brendan BrowneElena Iparraguirre Gavin GunningCynthia Cohen Freue Mohamed Damak

Global Banks 2020 OutlookThe Unrelenting Hunt For Returns

Contents

2

Key Takeaways 3

BICRAs, Ratings, and Outlooks 4

Low For Longer 7

Fintechs – Disruption 8

Emerging Markets 9

Regulation – Resolution 10

Brexit 11

Market Liquidity 12

Climate Change 13

North America 14

Europe 18

Asia-Pacific 23

Latin America 28

Related Research 32

Analytical Contacts 33

Key Takeaways

– Credit conditions remain broadly supportive of banks' asset quality even if theeconomy is slowing down.

– Trade and geopolitical tensions remain elevated and undermine confidence.

– Central banks' responses to counter the slowdown are positive for banks' funding conditions but increasingly call into question their business models.

– The pressure on profitability is mounting, especially in Europe and Japan.

– The vast majority of outlooks on banks is stable globally, supported by low credit losses and high capitalization.

– Technology is disrupting retail banking across the globe.

3

BICRA And Trends For Top 20 Banking Markets

4

*The list only includes a selection of the changes made so far in 2019. A BICRA (Banking Industry Country Risk Assessment) is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10). Data as of Nov. 15, 2019.

BICRA changes in 2019*

– Japan lowered to 3 from 2

– Argentina lowered to 9 from 8

– Israel raised to 3 from 4

– Poland raised to 4 from 5

– Philippines raised to 5 from 6

– Indonesia raised to 6 from 7

– Greece raised to 9 from 10

Trend changes in 2019*

– Economic and industry risks to negativefrom stable on Germany

– Economic risk to negative from stable on Mexico

– Economic and industry risks to stable from negative on Brazil

– Economic risk to stable from positive on the Netherlands

Broadly Stable Ratings In 2019

Operating company issuer credit ratings. Data as of Nov. 15, 2019. Source: S&P Global Ratings.

Ratings Distribution For The Top 200 Rated Banks

0 5 10 15 20 25 30 35 40 45 50

CCC-

CCC

CCC+

B-

B

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-

AA

AA+

AAA

Number of ratings

November 2018

November 2019

5

The Ratings Bias Is Now Relatively Flat

Note: Ratings bias is positive bias minus negative bias. Data as of Nov. 15, 2019. CEE--Central & Eastern Europe; MEA--Middle East & Africa. Source:S&P Global Ratings.

Outlooks For The Top 200 Banks By Region

6

21%

8%

8%

33%

10%

4%

3%

11%

15%

71%

92%

92%

59%

82%

86%

94%

90%

61%

69%

8%

8%

8%

10%

6%

7%

28%

16%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Nov. 2018

Nov. 2019

Nov. 2018

Nov. 2019

Nov. 2018

Nov. 2019

Nov. 2018

Nov. 2019

Nov. 2018

Nov. 2019

CE

E &

ME

ALa

tin

Am

eric

aA

sia-

Pac

ific

Nor

thA

mer

ica

Wes

tern

Eur

ope

Negative

Stable

Positive

10-Year Government Bond Yields Continue Their Decline

Low For Longer Interest Rates

7

Source: Refinitiv.

– Extremely accommodative monetary policies are enabling economic imbalances to surface.

– The outlook for interest rates is also gradually pulling down banks' net interest margins.

– This is increasingly making weak profitability a structural problem.

– The pressure is particularly negative in Europe and Japan.

– Banks need to take strategic measures to improve efficiency as the pain will likely get worse before it gets better. Those less able to make structural changes will suffer more.

-2%

0%

2%

4%

6%

8%

10%

-2%

0%

2%

4%

6%

8%

10% USA

Germany

UK

Japan

Preferences

Client preferences for new technologies and digital banking andperceived likelihood to switch to nonbank competitors

Industry

Structure of the banking system and its ability to adapt and invest

Technology

Banks‘ technological capabilities relative to nonbank competitors

CGC

F

Regulation

Regulatory stance toward innovation and nonbank competition

SGCC C

GGCCG F G FS

Tech Is Disrupting Retail Banking

8

Note: GCC--Gulf Cooperation Council. Source: S&P Global Ratings.

Opportunities And Threats From Tech Disruption Relate To Four Factors

Ver

yLo

wLo

wM

oder

ate

Hig

hV

ery

Hig

h

Ris

k fo

r ban

ks

GCC GCC

ChinaC

FranceF

GermanyG

SwedenS

U.K.U.K.

S U.K. U.K. GCCF S U.K.

GCCC U.K.

9

Resilient Portfolio Flows To Emerging Markets Are Expected To Continue

Emerging Markets See Easing Financing Conditions

Sources: IIF, S&P Global Ratings calculations.

– Emerging-market growth is the weakest in a decade, and the pickup in 2020 will be unspectacular.

– Financing conditions continue to ease, driven by Fed and ECB, which is positive for capital flows.

– Investors' appetite for emerging markets prevails, but selectivity is increasing.

– Geopolitical risks, political instability, and social unrests are hurting a number of banking sectors.

– Dependence on external debt is a high risk for some banks, including in Turkey, Qatar, and Lebanon.

– High leverage in China remains a key concern, although the largest banks remain resilient.

-20

0

20

40

60

80

Bil.

US

$

EM ex-China equity

China equity

Debt

Total portfolio flows

Total flows, average 2010-2014

Basel III finalization is the high point in a multiyear overhaul of prudential regulation

Regulation And Resolution: Coming To A Finish Line

– Full implementation (in most jurisdictions) will not be completed before 2028.

– We expect an improved comparability in ratios despite areas of uneven implementation of global standards.

– Generally, we expect a much higher impact on capital ratios for European banks.

– We see policymakers taking measures to ease the burden on smaller, simpler institutions.

– We view U.S. regulators' finalized rules on the tailoring of bank regulation to the systemic risk they pose as slightly credit negative.

10

There are stark differences in the implementation of bank resolution frameworks

– A steady push continues to make systemic banks resolvable.

– The EU and U.S. have already transitioned to effective bail-in regimes.

– European jurisdictions remain behind the U.S. in implementation.

– Other G-20 policymakers are cautious about eliminating possibility of extraordinary government support.

– Nearly 40% of unsecured bank debt in North America and Europe is rated in the 'BBB' category, up from 25% four years ago, as loss-absorbing instruments account for a growing share of funding.

Softening Conditions Ahead Of Brexit Endgame

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Pretax margin Preprovision income / revenues margin

11

– The major U.K. banks show continuing robust asset quality metrics, stable capital, and healthy funding and liquidity.

– This provides a firm foundation to weather Brexit-related uncertainties and other risks such as trade tensions.

– While U.K. banks have built resilience, a no-deal Brexit could change our broadly stable ratings assessment.

*Data for 2019 is for the half-year. Source: S&P Global Ratings database and definitions, and company accounts. Data is based on six-bank aggregate (Barclays, HSBC, Lloyds, Nationwide, RBS, and Santander UK (where available).

Major U.K. Banks Profit Margins Provide Some Buffer

Spike In U.S. Repo Rates - Market Liquidity Is Key

0

500

1,000

1,500

2,000

2,500

3,000

Bil.

US

$

12

– The mid-September spike in repo rates likely resulted from technical factors and financial requirements that limit banks' willingness to support market financing.

– Fed balance sheet contraction caused excess reserves in the system to fall.

– The incident doesn't reflect credit fears about participants but shows the fragility funding markets can display.

Note: Monthly, not seasonally adjusted. Source: U.S. Federal Reserve Bank of St. Louis.

Excess Reserves In U.S. Banking System Have Declined

13

E—Estimate, includes the $118 billion issuance as of June 30, 2019, and S&P Global Ratings' forecast of $180 billion for the full year.Source: Climate Bonds Initiative.

Banks Are Now The Main Issuers Of Green-Labeled Bonds

Climate Change Poses Risks For Banks

– The shift to a lower-carbon economy poses physical and transition risks for banks.

– We see as positive regulators' initiatives to encourage banks to better quantify climate-related risks and embed them in strategy and in setting risk appetite.

– However, there is an urgent need for banks to improve and standardize data transparency.

– Climate change considerations could materially transform the way banks operate and have a greater influence on their creditworthiness, since some of them will inevitably be better prepared than others.

0

50

100

150

200

2012 2013 2014 2015 2016 2017 2018 2019E

Bil.

US

$

Other debt instruments Asset-backed securities Local governments Government agencies

Sovereigns Development banks Corporates Banks

Credit Conditions: North America

14

– We expect the U.S. economy to slow in 2020 to 1.7%.

– We put the risk of a U.S. recession at 30%-35%.

– Following three rate cuts in 2019, we expect the Fed to hold rates flat in 2020.

– The reduction in interest rates weighs on bank margins and will fuel further growth in leveraged, student, and auto loans.

– The buildup in nonfinancial corporate debt is a source of potential instability.

Data as of Aug. 31, 2019. Source: S&P Global Ratings Research.

A Divergence In Investment- And Speculative-Grade Corporate Composite Spreads

0

50

100

150

200

250

100

200

300

400

500

600

700

800

900

bpsbps

Five-year speculative grade (left scale)

Ten-year investment grade (right scale)

North American Banks

Key Expectations– Reduced interest rates are likely to limit earnings growth for most U.S. banks in 2020, if not cause declines.

– Loan growth is to remain in the low- to mid-single digits, which could partly offset the negative impact of lower margins.

– Banks will continue to contain costs by consolidating branches, containing head count, and further digitization.

– The 2020 implementation of new accounting standards for loan loss provisions will likely cause reserves to rise notably, particularly for banks with large consumer loan exposures.

– For Canadian banks, we expect operating performance to gradually strengthen.

Key Assumptions– GDP growth should slow to 1.7% and 1.4% in the U.S. and Canada in 2020.

– Credit losses have likely bottomed out and may gradually increase.

– The U.S.-Mexico-Canada free trade agreement will remain on a slow path toward ratification.

Key Risks– Corporate credit quality, particularly in leveraged lending, could deteriorate after several years of rapid growth.

– Credit quality may also worsen in auto, student, credit card, and commercial real estate lending.

– In Canada, a sufficiently negative employment shock could trigger a substantial decline in home prices, given elevated prices. This could be accompanied by noticeably higher losses on consumer loans.

15

Leveraged Loans Continue To Rise Nonbanks - Primary Investors Of Leveraged Loans

Leveraged Loans Are Mostly Held By Nonbanks

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

200

400

600

800

1,000

1,200

Bil.

US

$

Outstanding % covenant lite (of new issues)

16

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017 2018 3Q19

U.S. banks CLOs

Loan mutual funds Hedge, distressed & high-yield funds

Other

Source: Leveraged Commentary & Data (LCD).

– The issuance of leveraged loans cooled materially in the first half of 2019.

– CLOs continue to be the largest buyers of leveraged loans, with banks holding only a small minority.

Fed Funds Rate And NIM Are Correlated Earnings And Margins Gained Strength

Bank Earnings To Plateau Or Fall On Lower Rates

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

3Q91

4Q92

1Q94

2Q95

3Q96

4Q97

1Q99

2Q00

3Q01

4Q02

1Q04

2Q05

3Q06

4Q07

1Q09

2Q10

3Q11

4Q12

1Q14

2Q15

3Q16

4Q17

1Q19

Effective Fed Funds Rate, quarterly average (left scale)

NIM, All FDIC-Insured Commercial Banks (right scale)

17

Source: U.S. Federal Reserve economic data. Source: S&P Global Ratings.

– While U.S. banks benefited from higher rates and a cut in the corporate tax, recent rate cuts by the Fed are likely to erode their earnings.

– Historically, drops in the Fed funds rate have led to lower net interest margins.

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

0

50

100

150

200

250

300

2015 2016 2017 2018 2Q19

Bil.

US

$

Net income (left scale) Taxes paid (left scale)

Net interest margin (right scale)

– We expect somewhat weaker eurozone growth for 2020 at 1.1%, primarily reflecting slower manufacturing conditions in Germany. The U.K. economy will continue to slow due to Brexit uncertainty.

– The ECB’s new expansionary package will maintain rates in negative territories at least until 2023.

– The risks to growth and confidence remain mainly political: increasing global trade tensions, Brexit, and political fragmentation.

Germany And Italy Weigh On Eurozone Growth Low Yields Pose Challenges To Banks

Credit Conditions: EMEA

0.5

1.0

1.5

2.0

2.5

3.0

Dec-17 Dec-18 Dec-19 Dec-20 Dec-21

GD

P (Y

oY %

)

Actual Dec-18f Sep-19f

18

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21

10yr

Bun

d yi

eld

(%)

Actual Dec-18f Sep-19f

Source: S&P Global Ratings. f—S&P Global Ratings forecast. Source: S&P Global Ratings. Refinitiv. Actual yields are quarterly averages.

EMEA Banks

19

Key Expectations– The ratings bias is flat and likely to turn negative through 2020.

– In the absence of meaningful strategic initiatives to tackle costs and restructure, the business models of some banks will come under more pressure.

– Capitalization and asset quality should hold up, and we could see further asset quality improvement in some markets.

– Systemic banks will continue making progress in the buildup of bail-in buffers.

– The rationale for consolidation is stronger than ever, but most banks are unwilling to pursue it.

Key Assumptions– The U.K. will not leave the EU without a deal.

– Economic growth will be modest, but the region will not enter into recession.

– The success of monetary policy actions in boosting growth will be limited in the absence of fiscal stimulus.

– Credit conditions will remain favorable and support refinancing and asset quality.

Key Risks– A disruptive Brexit that leads to a severe economic downturn in the U.K.

– Economic growth challenges spread to eurozone countries other than Germany and Italy.

– A lack of a decisive response from banks to their low profitability.

– A build-up of asset bubbles, higher risk taking, or irrational pricing dynamics.

1. Low Profitability Is Becoming A Structural Issue 2. Banks Need To Tackle Their Costs

The Challenges Of Low-For-Much-Longer Rates

(5)

0

5

10

15

20

Median: 6.8%

2020 projected ROE (%)

20

0

20

40

60

80

100

Median: 59%

2020 projected cost-to-income ratio (%)

1. Projected 2020 return on equity for top 100 EMEA banks. 2. Projected 2020 cost to income ratio for top 100 EMEA banks. 3. Increase in nominal house prices. 4. Yield curves for EMEA nonfinancials by rating category. Source: S&P Global Ratings.

3. Risk Of Build Up Of Bubbles In Property Markets 4. Too Low Pricing For Risk In Corporate Europe

75

100

125

150

175

200

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

Dec

-17

Jun-

18

Dec

-18

Jun-

19

(Ind

ex, Q

4 20

09=

100)

Iceland Austria HungaryLuxembourg Germany Czech Rep.Portugal Netherlands

-1%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

B

BB

BBBA

AA

1. Germany: Profitability Is Under Pressure 2. France: Need To Address Inefficiencies

Key Issues In EMEA Banking Systems

0.0%

1.0%

2.0%

3.0%

4.0%

GR IE PT PL ES UK BE FR DK AT SE DE IT NL

Lending margin

21

63 62

5956

6059

57

6261

6765 66 67 67 68 69 68 67

50%

55%

60%

65%

70%

2012 2013 2014 2015 2016 2017 2018 2019F 2020F

Top 50 European banks Top 5 French banksCost-to-income ratio

3. UK: Impact Of Brexit On The Economy 4. Italy: Workout Of Legacy NPAs

85

90

95

100

105

110

UK GDP (volumes)

% Baseline % No-deal Brexit % Global financial crisis

0%

5%

10%

15%

20%

25%

0

40

80

120

160

200

bps

NPA to loans (right scale)Cost of risk (left scale)Estimated average credit losses over a cycle

1. Lending margins are measured as the difference between interest rates for new business loans and a weighted average rate of new deposits. Sources: ECB, S&P Global Ratings. 2. Inefficiencies measure based on the cost-to-income ratio (%). F--S&P Global Ratings forecast.

1. GDP Growth Will Only Recover Slightly 2. Asset Quality Is Broadly Stable Except In Turkey

Prospect For Emerging Market Banks In EMEA

-4%

-2%

0%

2%

4%

6%

8%

2015 2016 2017 2018 2019F 2020F 2021F

GCC Turkey Russia South Africa

22

F--S&P Global Ratings forecast. Source: S&P Global Ratings.

3. Turkey, Qatar, Lebanon: Vulnerable Funding 4. Profitability Is Stabilizing

0%20%40%60%80%100%120%140%160%180%

0%

2%

4%

6%

8%

10%

12%

2015 2016 2017 2018 2019F 2020F 2021F

GCC Turkey Russia South AfricaGCC Turkey Russia South Africa

Lines--NPLs / total loans. Bars--Provisions / NPLs

-20-10

010203040506070

2015 2016 2017 2018 2019F 2020F 2021F

Qatar South Africa Lebanon Turkey GCC X Qatar / Bahrain Russia

Net banking sector external debt as a % of system wide domestic loans

0.0

0.5

1.0

1.5

2.0

2015 2016 2017 2018 2019F 2020F 2021F

GCC South Africa Turkey Russia

Return on assets (%)

U.S. - China Trade Dispute U.S. imposed tariffs on remaining US$300 Bil. of Chinese imports

Asia-Pacific's Investment-Led SlowdownReal GDP growth and investments

Credit Conditions: Asia-Pacific

23

Source: U.S. International Trade Commission Dataweb. Note: GDP weighted by purchasing power parity, excluding China and Vietnam due to data availability. Sources: CEIC, S&P Global Ratings Economics.

– We expect credit conditions to be bumpy. While interest rates should trend lower or hold steady, China's economic slowdown and the trade war is dampening consumer and lender sentiment. In turn, this is holding down revenue and profit growth, intensifying refinancing risk.

– U.S.-China trade-tech tensions have dragged on and growth has come in below our expectations.

– The greatest near-term risk for banks is the strategic conflict between the U.S. and China. Other top risks include corporate refinancing and market liquidity, property repricing, and China's debt leverage.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mineral ProductsHide and skins

Transportation equipmentAnimal products

Prepared foodstuffsChemicals

MiscellaneousFuel

MetalsWood products

Plastics and rubberVegetable products

MachineryStone and glass

Electronics and electrical machineryTextiles and clothing

FootwearToys and sports equipment

As of Sep 23, 2018 List 4A (Sep 1, 2019) List 4B (Dec 15, 2019) Not covered

0%

2%

4%

6%

8%

10%

12%

Mar

-11

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11N

ov-1

1M

ar-1

2Ju

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ar-1

4Ju

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ar-1

6Ju

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Jul-

17N

ov-1

7M

ar-1

8Ju

l-18

Nov

-18

Mar

-19

GDP Investment

Asia-Pacific Banks

Key Expectations– The majority of outlooks is stable and are likely to remain so in 2020.

– The regional slowdown means that banks may see a slight erosion in their asset quality.

– Nonperforming assets in India – a negative outlier – will remain high.

– Earnings and capital should remain generally supportive of ratings at current levels.

Key Assumptions– A slower macroeconomic outlook. The cyclical downturn in Asia-Pacific trade will likely challenge asset quality and

profitability but should be manageable at current rating levels for most banks.

– No significant increase in geopolitical stresses, including in Hong Kong where protests have remained contained, with limited spillover to other economies.

– Governments will remain supportive. In contrast with Western Europe and the U.S., systemically important banks in most jurisdictions will likely benefit from government support in case of need.

Key Risks– High private-sector indebtedness and high asset prices amid a protracted low interest rate environment across much

of the region. These factors set the stage for a potential deterioration in credit quality.

– A range of property risks across much of Asia-Pacific banking--including banks' high exposure to property, high property prices, and corporate-sector property risks--are a risk for asset quality.

24

25

2. China Debt Ratios Shift Higher1. GDP Softens Due To Trade Tensions

3. Residential Property Prices Trend Higher 4. NPAs Are Lower For Strong Banks

Asia-Pacific Banks

1. *For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22. §Asia Pac: Australia, Japan, and emerging markets Asia. †EM Asia: emerging markets Asia = China, India, NIEs, and ASEAN. ‡NIE: Newly industrialized economies = Hong Kong, Singapore, South Korea, Taiwan; ‡‡ASEAN: Indonesia, Malaysia, Philippines, Thailand. 2 & 3. Source: BIS 4. Graph shows average ratio of nonperforming assets to gross loans by region for banks within the Global Top 200 that have a stand-alone credit profile assessment in the 'a' category. Source: S&P Global Ratings.

012345678

2018 2019 2020 2021 2022

0%

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150%

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300%

2013 2014 2015 2016 2017 2018 2019 Q1

Household credit-to-GDPCorporate credit-to-GDPGovernment credit-to-GDP

50

100

150

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250

Mar

-10

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-10

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-11

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-12

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-18

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-19

Inde

x va

lue

Australia China Hong Kong SAR India

Japan Korea Malaysia Singapore

Phillipines New Zealand Thailand Indonesia

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Asia-pacific excl.Japan

Western Europe North America Japan

2012 2013 2014 2015 2016 2017 2018 2019F 2020F

1. China: Interbank Spreads Widened After Baoshang Bank Takeover In May

2. India: Asset Quality Recovery Delayed Amid Macro Headwinds

Key Asian Banking Systems Update

2.0%

2.5%

3.0%

3.5%

4.0%

Megabanks JSCBs

City commercial banks Rural commercial banks

26

3%4% 5%

8%

10%

12%

9% 9% 9%

2012 2013 2014 2015 2016 2017 2018 2019F 2020F

Nonperforming loans vs. total loans

1. See “China's Bailout Of A Troubled Bank Isn't Surprising,” May 27, 2019. 2. NPLs--Nonperforming loans. F--Forecast. Sources: Reserve Bank of India, S&P Global Ratings. 3. Sources: Government data, S&P Global Ratings. 4. Note: National house price index: March 2012=100. F--S&P Global Ratings forecast.

3. Japan: Wafer-Thin Interest Margins Continue 4. Australia: Imbalances Ease

0.0%

0.5%

1.0%

1.5%

2015 2016 2017 2018 2019F 2020F

Applied interest rate on new loans

Average interest rate on outstanding loans (stock basis)

0

50

100

150

2012 2013 2014 2015 2016 2017 2018 2019F 2020F

Private sector borrowings from banks as % of GDP

National house price index (inflation-adjusted)

Joint-stock commercial banks

1. ASEAN: Good Profitability But Downward Pressure From Interest Rate Cuts

2. Hong Kong: Short-Term Money Flows Have Little Impact On Customer Deposit Balance

Key Asian Banking Systems Update

27

1. Source: S&P Global Ratings. 2. Source: Hong Kong Monetary Authority 3. Source: Bank of Korea. F--S&P Global Ratings forecast. 4. ROAA--Return on average assets. F--S&P Global Ratings forecast. Sources: Taiwan's Financial Supervisory Commission, Taiwan Ratings Corp.

3. Korea: Household Debt Growth To Moderate 4. Taiwan: Profitability Constrained By Low Interest Rates And High Competition

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%

Net interest margin

Pretax ROAA

Provisions/ average assets ratio

0%

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15%

20%

25%

0.0%

1.0%

2.0%

3.0%

Indonesia Philippines Thailand Malaysia Singapore

2016 (left scale) 2017 (left scale) 2018 (left scale)

2019F (left scale) 2020F (left scale) 2018 Tier 1 ratio (right scale)

0246810121416

0

200

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HK

$ tril.Bil.

HK

$

Aggregate balance before discount window (left scale)

Total customer deposits of all AIs (right scale)

Fed started quantitative

easing during GFC Fed started its rate hike cycle

0%

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8%

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40

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190

2004 2006 2008 2010 2012 2014 2016 2018 2020F

KR

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0 tr

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Household debt (left scale)

Household debt-to-income (left scale)

Household debt growth (right scale)

S&P Global Ratings' Forecasts For Latin American GDP Growth

Credit Conditions: Latin America

28

– We expect another year of weak growth in 2020, with significant downside risks due to political tensions and rising social protests in some countries.

– Brazil's recently approved pension reform is an important step in addressing the government's rapidly rising debt levels, but further measures are needed to control public spending.

– We expect Argentina to default again at some point after the new administration takes office.

– We expect a rise in GDP growth in Mexico in 2020. However, the risks are mostly to the downside because of the uncertainty that some of the government's policies have created, especially regarding the energy sector.

F--forecast. Source: S&P Global Economics. Note the Latin American GDP aggregate forecasts are based on three-year average (2015-2017) PPP GDP weights. Our GDP numbers are based on seasonally adjusted series when available.

Baseline Scenario Downside Scenario2017 2018 2019F 2020F 2021F 2022F 2019F 2020F 2021F 2022F

Argentina 2.7 -2.5 -3.0 -1.0 1.5 2.0 -4.0 -2.5 0.0 1.0Brazil 1.1 1.1 0.8 2.0 2.2 2.5 0.5 1.0 1.2 1.5Chile 1.5 4.0 2.4 2.8 3.0 3.0 2.0 2.4 2.5 2.5Colombia 1.4 2.6 3.2 3.2 3.3 3.3 2.7 2.5 2.5 2.5Mexico 2.4 2.0 0.4 1.3 1.7 1.9 0.2 0.6 0.9 1.0Panama 5.3 3.7 3.5 4.0 4.5 5.0 2.5 3.0 3.5 3.5Peru 2.5 4.0 2.6 3.0 3.2 3.5 2.0 2.5 2.8 2.8Uruguay 2.6 1.6 0.5 1.5 2.3 2.8 0.2 1.0 1.8 2.0Venezuela -15.7 -20.0 -20.0 -5.0 0.0 3.5 -30.0 -15.0 -5.0 -5.0Latin America 0.9 0.4 -0.3 1.3 2.1 2.5 -1.2 0.0 1.0 1.2Latin America ex. Venezuela 1.7 1.4 0.7 1.6 2.2 2.4 0.3 0.8 1.2 1.5

Latin American Banks

Key Expectations– Uncertain political dynamics, weakening investment and domestic demand, and volatile external conditions will curb

economic growth pace and credit demand.

– Modest credit expansion and pressure on asset quality, but mitigated by good provisioning coverage.

Key Assumptions– As a result of the Fed's monetary policy, we expect the potential easing cycle in interest rates--in most countries--to

weaken banks' profitability with a lag of 12-18 months.

– Banks' operating performance in Brazil should remain fairly stable, while Mexico could face economic headwinds and conditions in Argentina will remain weak for some time.

– Credit losses will remain manageable across the region.

Key Risks– A prolonged period of poor economic growth--if political uncertainties prevail discouraging business and consumer

confidence--could mute credit demand and cause nonperforming assets to rise.

– Volatile deposits in Argentina could continue pressuring banks' funding.

– Venezuelan immigration could pressure employment and wages in countries such as Colombia, Peru, Chile, and Argentina, potentially affecting asset quality.

– Even though banking losses related to cybersecurity are currently manageable, risks keep rising.

29

1. Lending Growth To Converge 2. Stable Asset Quality With Downside Risk

Latin American Banks

-5%

0%

5%

10%

15%

2016 2017 2018 2019F 2020F

Brazil ChileColombia MexicoPeru

30

0%

1%

2%

3%

4%

5%

Brazil Chile Colombia Mexico Peru Argentina Panama

2016 2017 2018 2019F 2020FNPLs (%)

F--S&P Global Ratings forecast. Source: S&P Global Ratings.

3. Low Loan-To-Deposit Ratios 4. Sound Profitability Despite Challenges

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Brazil Chile colombia Mexico Peru Argentina Panama

2016 2017 2018 2019F 2020F

0%

10%

20%

30%

40%

50%

60%

Brazil Chile Colombia Mexico Peru Argentina Panama

2016 2017 2018 2019F 2020F

Return on equity (%)

1. Low Credit Penetration, Apart From Chile and Panama 2. Comfortable Provisioning Coverage

Latin American Banks

31

F--S&P Global Ratings forecast. Source: S&P Global Ratings. 2. Provisioning coverage as measures by the ratio of loan loss reserves to nonperforming assets.

3. Share Of Foreign Currency Loans Is Mainly Directed To Exporters (Except in Peru)

4. Regional Political Challenges Are The Main Drag On Investor Confidence

-4.0 -3.0 -2.0 -1.0 0.0 1.0

ArgentinaBrazilChile

ColombiaMexico

PanamaPeru

UruguayLatAm 6

2019 2020Changes in baseline GDP forecast from 2Q 2019

0%

5%

10%

15%

20%

25%

30%

35%

Brazil Chile Colombia Mexico Peru Argentina

2016 2017 2018 2019F 2020F

0

50

100

150

200

250

2016 2017 2018 2019F 2020F

Brazil Chile Colombia MexicoPeru Argentina Panama

0%

20%

40%

60%

80%

100%

Chile Panama Colombia Brazil Peru Mexico Argentina

Total credit to GDP 2020F

Related Research – Indian Financial Sector Braces For Fat Contagion Tail Risk, Oct. 23, 2019

– The U.S. Banking Sector Should Remain Stable Despite Easing Regulatory Oversight, Oct. 22, 2019

– European Banks Count The Cost Of Inefficiency, Oct. 22, 2019

– Top 100 Banks: Capital Buildup Is Slowing, Oct. 16, 2019

– ECB's 2019 Stress Test Confirms Eurozone Banks Have Adequate Liquidity, Oct. 10, 2019

– The Fed's Rate Cuts Will Likely Pressure U.S. Bank Spread Income And May Spark Greater Credit Risk, Oct. 8, 2019

– Asia-Pacific Financial Institutions Monitor 4Q 2019: Profitability Woes Weigh On Japan's Banks, Oct. 8, 2019

– What Will Change With The New Euro Short-Term Rate, Oct. 1, 2019

– Bail-In Debt Remodels The Risk Profile Of Bank Funding In Europe And North America, Sept. 26, 2019

– For German Landesbanken In 2019, The Risk Is Down, But Long-Term Questions Remain, Sept. 26, 2019

– What Volcker Rule Changes Mean For Bank Ratings, Sept. 24, 2019

– How To Say Goodbye To LIBOR Without Creating Market Chaos, Sept. 23, 2019

– The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis, Sept. 12, 2019

– Climate Change: Can Banks Weather The Effects, Sept. 9, 2019

– China Credit Spotlight: The Coming Exit Of Struggling Banks, Aug. 28, 2019

– The Future Of Banking: Virtual Banks Chase The Dream In Asia-Pacific, July 17, 2109

– The Future Of Banking: Will Retail Banks Trip Over Tech Disruption, May 14, 2019

– Europe’s Banks Must Step Up To Crack Down On Financial Crime, April 18, 2019

– Why Japan's Regional Banks Aren't As Profitable As German And U.S. Peers, March 11, 2019

32

Analytical Contacts

33

Global FI Sector Lead

Emmanuel VollandParis+33 1 4420 6696emmanuel.volland@spglobal.com

North America

BrendanBrowneNew York+1 212 438 7399brendan.browne@spglobal.com

Western Europe

Elena IparraguirreMadrid+34 91 389 6963elena.iparraguirre@spglobal.com

Asia Pacific

GavinGunningMelbourne+61 3 9631 2092gavin.gunning@spglobal.com

Latin America

Cynthia Cohen FreueBuenos Aires+54 11 4891 2161cynthia.cohenfreue@spglobal.com

Middle East & Africa

Mohamed DamakDubai+971 4372 7153mohamed.damak@spglobal.com

34

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