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 2024 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).

Chart 1

Table 1

Rationales For BICRA Related Actions Taken In Q1 2024

Portugal

In March 2024, we have revised our economic risk score for Portugal to '5' from '6'. We have observed continuous improvement in Portugal's external financial position and public sector indebtedness. For more than a decade, Portugal's private sector has also deleveraged, and its indebtedness is now better aligned with its debt capacity, which reduces credit risk for banks.

We have also revised our industry risk trend for Portugal to positive from stable. This is because deleveraging has also strengthened Portuguese banks' funding profiles, with domestic retail deposits emerging as banks' primary source of funding and reliance on external sources kept at lower levels. Portuguese banks currently hold deposits in excess of loans and thus have minimal reliance on external funding. Indeed, the banking system's net external position turned negative (i.e., banks became external lenders) in 2021 and has remained negative since then. In 2023, Portuguese banks repaid about €7 billion of targeted longer-term refinancing operations to the European Central Bank, of which the remaining balance amounts to about €4.7 billion, and managed to maintain sound liquidity thereafter. Banks have tapped the foreign capital markets only occasionally and primarily to build up their minimum requirement for own funds and eligible liabilities, rather than to fulfill pure funding needs. But we think they could access them if needed. The ongoing improvement of Portugal's sovereign creditworthiness should further support investors' appetite for Portuguese risk, including for Portuguese banks.

Moreover, a favorable interest rate environment and solid efficiency have boosted banks' profitability in Portugal. Portuguese banks' profitability improved notably in 2023, outperforming our expectations. The rapid increase of interest rates pushed up banks' net interest income significantly (banks' net interest margin reached 2.6% in the first nine months of 2023 compared with 1.5% in the first nine months of 2022), given that most lending is at floating rates. Deposits migrated from demand to time deposits to a larger extent than in other countries, but still banks were able to contain the increase in funding costs. In addition, previous years' efforts on the cost side paid off and the efficiency ratio further improved, to an estimated 45% at Sept. 30, 2023, comparing well with that of peers. The containment of the cost of risk at 47 basis points also supported banks' bottom lines. As a result, the Portuguese banking system posted a return on average equity of 14.6% for the first nine months of 2023, which compares well with the average 4.5% reported in the past five years, and we think the improvement is sustainable. Indeed, we expect banks' 2024 profitability will remain solid. Finally, previously wide differences in performance among peers have reduced.

Kazakhstan

In March 2024, we have revised our economic risk score for Kazakhstan to '7' from '8'. We believe the Kazakhstani banking sector has shown better resilience to macroeconomic challenges in recent years, amid exacerbated geopolitical risks in the region. The system's asset quality metrics and financial performance have been significantly better than our expectations. Kazakhstan's banking industry has recovered from a protracted correction and credit risks are now under control. We estimate that systemwide nonperforming loans (NPLs; defined as Stage 3 under International Financial Reporting Standards) are likely to remain broadly stable at about 8% in 2024 versus about 18% in 2020. In our base-case scenario, we forecast credit costs will remain subdued in and beyond 2024, at 1.3%-1.5% of average loan books, which is still well below their historical average of more than 3% through recent cycles. Meanwhile, the legacy stock of NPLs has already been largely provisioned at the average level of about 75%. We expect the recovery will continue and support banking sector operating performance at least through 2024. We forecast retail lending will expand up to 20% in nominal terms in 2024 compared with an average of 25%-30% in 2022-2023. The regulator has signaled that it will keep the fast-growing retail segment under control, and we therefore anticipate a tighter regulatory environment and a gradual cooling of the housing market. We think that retail lending is likely to peak, given base effects and limits on the ability of the household sector to absorb substantially more debt.

We have also revised our industry risk trend for Kazakhstan to positive from stable. We acknowledge that the banking regulator has taken several steps to strengthen banking supervision. These include conducting a systemwide asset quality review in 2019, transition to supervisory review and evaluation process practices, and introducing a number of measures (including variable risk weights for capital adequacy ratios) to limit banks' risk appetites. However, the regulator tends to address problems on a case-by-case basis. Although we observe enhancements in financial oversight, we still consider that Kazakhstan's banking regulator lacks independence and can be subject to political interference. The Kazakhstani banking system has largely resolved the interruption of Russian banking activities in 2022 in an orderly manner through market-based solutions with regulatory support, which helped to avoid a banking crisis and operational disruption. The Kazakhstani regulator supported the banking sector in absorption of the short-term effect of the shock amid a rapid realignment of market structure.

Macao

In January 2024, we have assigned Macao Special Administrative Region (Macao) to BICRA Group '5'. The economic risk score for Macao is '5' and the industry risk score is '5'. The economic risk and industry risk trends are both stable. Although Macao is a wealthy economy with high per capita income, private-sector leverage is likely to stay high at about 150% over the next two years. Nevertheless, the income of a large section of households is significantly below average. Credit risks are also heightened by high sector and single-name concentration, and banks' sizable exposure to borrowers based in China. We believe China's slower growth and weakness in the property market will strain the asset quality of banks in Macao.

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: March 2024, March 26, 2024
• 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