Below we provide more in-depth rationales for our sector anchors by country. We update these as needed to reflect changes in our view of anchor risks, pressures, or rationales, and at least annually.

After another surprisingly resilient year in 2024, which saw inflation reduced and policy rates start to decrease in most economies, we expect global GDP growth to likely slow in 2025, to 3% from 3.3% in 2024. We expect the U.S. to slow further to 2% growth, with Europe picking up slightly to a still slow 1.2%, and China growth to slow yet again to 4.1%. Across the globe, as a result of a slowing economy and the high cost of debt, we expect some macroeconomic and credit deterioration in 2025. While not expected, material economic deterioration could weigh on some anchors and, ultimately, the ratings on some countries' securities firms.

While economic risks--like inflation and the interest rate trends, as well as geopolitical event shocks to market values and volatility--may be at least partially correlated, industry risks are almost entirely country specific, given differences in market structures and development, financial system health, competition, and regulations. We think that banking industry risks are stable in all countries with a securities firm anchor..

We expect total debt issuance to grow again this year in most markets. This should support higher investment banking revenue in most countries with anchors. That said, while 2024 was marked by upside surprises to economic growth and many markets, this year may see both decline, keeping issuance growth balanced. However, if interest rates remain higher than even the more conservative estimates, this could hamper a recovery in issuance volumes. Another key variable is retail investor engagement, which tends to suffer when markets drop or become volatile.

Anchors Reflect Our View Of Sectors' Economic And Industry Risks

The foundation of our bank and nonbank financial institution anchors is our Banking Industry Country Risk Assessment (BICRA; see "Banking Industry Country Risk Assessment Methodology And Assumptions," Dec. 9, 2021). We use our BICRA--which is based on our view of the economic and industry risks of a country's financial system--to derive the bank anchors. To determine our securities firm anchors, we start with a given country's bank anchor because the sectors share macro risks. We then adjust based on our view of the specific incremental economic and industry risks securities firms face relative to banks in a given country.

The securities firm anchor is typically two notches lower than the bank anchor, though it can be more or less depending on securities firms' incrementally higher or lower industry and economic risks relative to banks (see table 1).

Table 1

In our view, securities firms generally have higher anchor risks than traditional lending- and deposit-focused banks. The main reasons for this are securities firms' typically lower level of regulatory oversight, lack of access to central bank funding or other ongoing support compared with prudentially regulated banks, and higher competitive risk.

Specifically, securities firms' financial performance is typically more volatile than that of traditional banks because their often less-diversified businesses and more limited sources of recurring revenue make them more subject to prevailing capital markets and competitive conditions. These weaknesses amplify the comparatively riskier business of securities market making and trading, as well as securities firms' confidence sensitivity.

In addition, securities firms' economic and funding risks are typically higher in countries with structurally less liquid or more volatile capital markets. This is one of the primary reasons Chile's anchor is three notches lower than the bank anchor, instead of the standard two notches. However, even in countries with historically more liquid and less volatile markets, securities firms are typically still more exposed to downturns in market and economic conditions than banks.

For instance, an uncertain economic outlook that tempers corporate activity and investors' risk tolerances has historically contributed to greater earnings volatility for securities firms than traditional banks. Revenue volatility hinders securities firms' ability to generate stable and recurring earnings sufficient to offset risk of capital losses owing to market, credit, or operational losses.

The supportiveness of securities firms' frameworks and their risk exposures vary considerably by country. For instance, China's securities firm anchor was formerly two notches below its bank anchor, largely to reflect its very high equity market volatility; only moderately broad and deep debt capital markets; and tight regulatory limits on securities firms' activities, risk, and leverage. This compared to the U.S., anchor, which also has a two-notch difference, because although U.S. securities firms benefit from more liquid and less volatile capital markets, official support and regulatory oversight are much less comprehensive.

However, in 2018 when we lowered the Chinese bank anchor one notch because of higher credit risk in the economy, we maintained the securities firm anchor at only one notch below the bank anchor, because we believed that the lowered bank anchor incorporated more shared risks and because securities firms in China were less exposed to the higher credit risk than Chinese banks. While we remain vigilant of potential credit and market risks arising from the securities industry's exposures to China's property and local government financing vehicle sectors, we believe risks are manageable thus far.

Recent anchor developments and changes

While most anchors remained unchanged in 2024, there were changes that reflected improving underlying economic or industry risk conditions in Chile, Cyprus, and Kazakhstan. In Chile, reduced economic pressures resulted in the BICRA economic risk trend returning to stable from negative, indicating reduced pressure on the securities firm anchor and firms. In 2024 Cyprus's economic improvement moved the economic risk score to 6 from 7, while improvements in regulation resulted in a positive industry risk trend. In February 2025, stronger bank sector funding improved the industry score, resulting in improving

the bank anchor by one notch to 'bb+'. However, since this benefit was limited for securities firms, the Cyprus securities firm anchor remained unchanged. In 2024 the Kazakhstan bank and securities firms anchors each were raised one notch to reflect improved regulation and institutional framework, which raised the industry risk score to 7 from 8.

Conversely in Korea, it is our view that headwinds in the domestic and overseas property markets, where Korean securities firms have sizable exposure, are pressuring the anchor and ratings of some securities firms. We attribute the earlier rapid increase in securities firms' property exposures to heightened competition, which increased risk appetite in a search for higher profits.

Rationales For Our Securities Firm Anchors By Country

Chile (bb+)

The 'bb+' anchor for securities firms in Chile indicates our view of the country's economic and industry risks. The anchor for securities firms in Chile is three notches below our anchor for domestic banks, compared with our standard two-notch adjustment. (Please see, “Banking Industry Country Risk Assessment: Chile", Nov. 7, 2024)

The standard two-notch adjustment generally reflects our view that the funding risk for securities firms is higher than for banks, because these firms typically lack access to the central bank's credit lines--as is the case in Chile--and face strong competition from banks and among securities firms. Our additional notch for our brokers anchor currently reflects the less liquid and developed domestic capital markets compared with peers like the U.S and U.K.

While Chilean securities firms have benefited from favorable competitive conditions, thanks to the country's privatized pension system (which has helped diminish business cyclicality), withdrawals of savings earlier in the pandemic shrunk the pension system relative to GDP, somewhat hurting domestic capital markets. Pension savings currently account for about 60% of GDP, compared with 83% in late 2019.

China (bb)

The anchor for Chinese securities companies is 'bb', one notch below China's bank anchor. The primary drivers for the one-notch gap include the securities brokers' higher exposure to the equity market, slightly weaker regulations vs. banks, and lack of access to central bank funding compared to banks.

The anchor for Chinese securities firms reflects their much more prominent exposure to the equity markets than that of banks. In addition to investment returns, brokerage, investment banking, and other fee income are indirectly related to the dynamics of the equity market. Chinese securities firms' exposure to equity market and competitive market pricing contribute to higher earnings volatility.

The current one-notch gap between China's bank and securities firm anchors is narrower than the standard two-notch difference. This is partially because we believe the relatively low bank anchor already reflects a level of risk typically seen in the securities firm sector. It also reflects that the China bank anchor factors in concerns over elevated credit risk in the economy, particularly some banks' risk exposures to property developers and local government financing vehicles in lower-tier cities and debt-laden regions. While we observe a growing corporate credit investment portfolio held by Chinese securities firms over recent years, we believe the credit risks faced by these firms remain substantially lower than those faced by the banks. By the same token, should there be any positive change in the outlook or the bank anchor based on the above concerns, the broker anchor is unlikely to move in tandem with the bank anchor.

Chinese securities firms are subject to prudential regulation with supervisory requirements on capital and risk metrics. Chinese regulators capital requirements have kept the industry's average leverage to less than 5x, well below what is typically seen in many mature countries. We consider the securities industry to be fragmented, despite an acceleration in sector consolidation. Securities firms in China generally do not have direct access to central bank facilities but benefit from indirect central bank access through China Securities Finance Corp. Ltd.

In our view, Chinese securities firms benefit from continuous capital market reform. Prudent regulatory leverage requirements allow companies to withstand a challenging operating environment. Despite the opening of China's financial sector, we think the impact on the securities sector varies by business line and will be limited over the next two years.

Cyprus (bb-)

The anchor for Cyprus securities companies is 'bb-'. The starting point for Cyprus securities firms is two notches lower than the 'bb+' Cyprus bank anchor to reflect our view of incrementally higher industry risk relative to banks.

The 'bb+' Cyprus bank anchor reflects that despite significant improvements, Cypriot banks remain more vulnerable to economic risks than many other European banks. As of Aug. 31, 2024, Cypriot banks' nonperforming exposure (NPE) ratios remain among the highest in Europe, at 6.8% of gross loans. Still, most are with the smallest banks--the four largest banks, representing about 90% of the market, had a 3.3% average ratio (excluding the asset-protection scheme-covered NPEs) at year-end 2023.

Banks' funding profiles improved due to rapid debt reduction, and improved domestic core customer deposits ratio, as well as dramatic reduction in reliance on nonresident deposits from authorities' actions to close accounts related to Russian customers and the impact of Western sanctions on some Russian entities and individuals. While nonresident deposits remain relatively high, these are mostly from outside the eurozone, with only a small share Russia-related, and in our view have proven rather stable over the past three years. (see, "Bank of Cyprus Upgraded To 'BBB-' On Improved Funding Profile Of The Sector; Outlook Stable", Feb. 7, 2025)

The securities firm anchor is two notches below the bank anchor to reflect our view of the sector's incrementally higher industry risk relative to banks. These include low barriers to entry and intense competition in the fragmented securities sector in Cyprus; inherent revenue volatility with revenue from securities firms typically more transactional than that of banks and therefore more prone to swings in market volatility, interest rates, and counterparty confidence; and more fragile funding profiles because of a lack of central bank access and short-term concentrated funding. As an EU member, Cyprus has implemented the Markets in Financial Instruments Directive (MiFID II) and applies EU Prudential requirements of investment firms (IFR).

Denmark (bbb-)

Our 'bbb-' anchor for Danish securities firms is two notches lower than the 'bbb+' anchor for Danish banks to reflect our view of higher industry risk relative to commercial banks.

We expect banks in Denmark to continue benefiting from the country's high-income and open economy, along with its stable political and institutional environment that encourages fiscal discipline and growth-promoting policies. We estimate real GDP growth in Denmark to reach 1.9% in 2024 and project 2.0% for 2025, spurred by the pharmaceutical sector, which offsets weaker performance and consumer sentiment in other sectors. We anticipate that the challenging operating environment will continue to pressure weaker players, albeit manageable. Small and midsize enterprises with nonmortgage credit exposures will be the most affected.

Our assessment of Danish industry risk reflects returns that lag many Nordic peers given flatter growth prospects, intense competition, and higher investments in compliance and digitalization that weigh on Danish banks' earnings. That said, higher interest rates, cost-efficient, stable funding through covered bonds, and relatively low credit costs in 2024 have boosted Danish banks' profitability and facilitated further capital build-ups from earnings retention and the funding of typically moderate shareholder dividends, in our view.

The two-notch downward adjustment for the Danish securities firms anchor captures higher competitive risk and less stable, more transactional revenue. Similarly, securities firms' economic risks may exceed those of banks because they are exposed to equity market volatility and dependent on market liquidity to monetize their assets.

We think that some securities firms face similar prudential regulation to banks and are actively supervised by the Danish Financial Supervisory Authority to ensure financial stability for Denmark. We think the Danish regulator is more likely to require a securities firm to have a banking license when deposits form a large portion of its funding base. However, not all securities firms carry banking licenses, leaving some without access to central bank funding.

Hong Kong (bbb)

The 'bbb' anchor for securities firms in Hong Kong is two notches below our 'a-' bank anchor. This reflects the risks that securities firms in Hong Kong share with local banks--like those related to the economy--and how the banking system's funding, institutional framework, and competitive dynamics support financial sector stability.

The 'a-' Hong Kong bank anchor reflects our view that banking sector fundamentals remain solid, with banks having strong capital and liquidity buffers. We expect downside risk to Hong Kong banks' asset quality to stay limited given adequate underwriting standards and controlled risk appetites. Hong Kong's residential mortgage delinquency rate remained at 0.11% at the end of November 2024, even after the city had a nearly 30% drop of property price from its historical peak in 2021, including a 7% drop in 2024. (see, "Banking Brief: Employment, Not Home Prices, Shape Hong Kong Mortgage Quality," Jan. 16, 2025)

We expect challenges from ongoing strains in commercial real estate in China and Hong Kong to remain manageable. Hong Kong banks have been actively managing their property portfolios by lowering exposures and building additional provisions.

Hong Kong's industry risk is the lowest among its peers. Hong Kong's prudent and effective banking regulation, strong payment culture, creditor-friendly legal framework, and banks' generally conservative lending practices are key strengths. We believe the banking sector will continue to benefit from a strong customer deposit base, driven by Hong Kong's high savings rate.

The two-notch downward adjustment for Hong Kong's securities firms anchor from the bank anchor acknowledges weaker elements than we typically see in other securities firm systems compared with banks, albeit offset by some strengths. Relative weaknesses include somewhat less stringent regulation and support, no access to central bank liquidity, lower barriers to entry, and less stable revenue. Specifically, for Hong Kong, we believe the regulatory framework for securities firms is less comprehensive than for commercial banks. However, these are offset by prudent regulatory oversight, modest self-discipline of market participants, and Hong Kong's broad and deep capital markets.

Japan (bbb-)

The 'bbb-' anchor for Japanese securities firms is two notches lower than the 'bbb+' Japan bank anchor, to reflect our view of incrementally higher industry risk for securities firms relative to banks.

The Japan bank anchor is 'bbb+', with stable economic and industry risk trends. We consider economic risk for Japanese banks to be relatively low compared with that of banks globally. Japanese banks benefit from operating in a large and diversified economy with various competitive industries. These strengths offset certain structural weaknesses, such like Japan's aging society, low economic growth, and high government debt. Gross private sector debt as a percentage of gross domestic product (GDP) has risen, but we expect it to continue to decline slowly into 2025.

Conversely, we view industry risk that Japanese banks face as somewhat higher than that of peer countries. This is because we believe that low profitability due to the fragmented banking industry could pose added risk to the stability of the banking system. We expect higher domestic interest rates will help the industry become more resilient, albeit slowly. The industry's robust systemwide funding structure underpins our industry risk score for Japan. We believe the banking sector's buffer (earnings and capital) is well positioned to absorb its credit costs. (See "Banking Industry Country Risk Assessment: Japan," July 31, 2024).

The securities firm anchor is two notches below the bank anchor to reflect our view of the sector's incrementally higher industry risk relative to banks. Our industry risk assessment of Japanese securities companies reflects:

• Their highly volatile earnings because of susceptibility to changes in domestic securities markets;
• Highly competitive sector;
• Reliance on wholesale funding; and
• Material but weaker regulatory oversight and institutional framework than those for the banking industry.

On the other hand, unlike many of their overseas peers, Japanese securities companies have access to funds from the central bank, which limits their funding risks relative to banks, in our view. We believe the anchor for Japanese securities firms is stable, mirroring Japan's stable economic and industry risk trends.

Kazakhstan (b+)

The 'b+' anchor for our ratings on securities firms in Kazakhstan reflects risks shared with the banking sector and those that are specific to the securities sector.

Our 'bb' anchor for banks in Kazakhstan reflects our view of economic and industry risks (both with scores of '7' in our Banking Industry Country Risk Assessment). (see "Various Rating Actions On Kazakhstani Financial Institutions On Regulatory Oversight And Performance; Outlooks Stable", Dec. 12, 2024)

The securities firm anchor is two notches below the bank anchor to reflect our view of the sector's incrementally higher industry risks relative to banks. These include lower regulatory oversight, a weaker institutional framework, higher competitive risk, and typically less stable and more transactional revenue.

We consider the banking industry in Kazakhstan as having recovered from a protracted correction, supported by favorable commodity prices stimulating credit demand, and a material improvement in asset quality. Elevated concerns regarding geopolitical risks and economic challenges in the region could affect the sustainability of improvements in credit risk and in banks' risk appetites. Although the stock of problem loans in the sector has decreased significantly over the past two years, the sector average is still relatively high, at about 8.5% of banks' lending books.

Over the past five years we observed that supervision and regulation over banks and securities companies has been gradually strengthening. This includes regular system-wide banks' asset quality reviews since 2019, transition to supervisory review and evaluation process (SREP) practices, and introducing measures to limit banks' risk appetite. This should help mitigate the risk that past episodes of financial institutions' failures and systemwide asset quality problems will be repeated in the future. While we observe enhancements in financial oversight, we still consider that Kazakhstan's banking regulator lacks independence and can be subject to political interference.

Korea (bbb-)

The 'bbb-'anchor for Korea-based securities firms is two notches lower than the bank anchor in the country. This reflects our view of the incrementally higher economic and industry risk that securities firms face relative to banks.

The bank anchor for Korea is 'bbb+', with stable economic and industry risk trends. Korea's banking sector has relatively low economic risk by global standards. Korea is a resilient and diverse economy with healthy fundamentals and competitive manufacturers, and we expect economic imbalances to be low. Although Korea's private-sector leverage is high, the banks' adequate risk management and underwriting standards will mitigate potential credit risks, in our opinion.

We believe the Korean banking industry benefits from strong domestic funding, counterbalanced by some reliance on foreign-currency wholesale funding. Korean banks will likely maintain adequate risk-adjusted profitability. Banking regulations in Korea are comparable to international standards, but we regard their record as mixed over the long-term economic cycle. ( see, "Banking Industry Country Risk Assessment: Korea", Nov. 29, 2024).

Korea's securities firms face higher economic risks than banks because they are susceptible to fluctuations in domestic securities markets. We also consider industry risk to be higher because Korean securities firms have a more volatile revenue base than banks, and their funding risk is higher as they lack access to central bank funding.

We think the 'bbb-' anchor for securities firms in Korea is under downward pressure. The firms' sizable property exposure in both domestic and overseas markets could strain their asset quality and profitability over the next one to two years.

Mexico (bb)

The 'bb' anchor for Mexican securities firms is two notches lower than the bank anchor in the country ('bbb-'). This reflects our view of the higher economic and industry risk that securities firms face relative to banks.

Despite the challenging economic conditions that Mexican banks will face during the next 12-24 months, we think the banking sector is well positioned to navigate challenges. Credit has expanded moderately and based on conservative lending policies, nonperforming assets are currently at healthy levels and remain fully covered by reserves, while capitalization remains a strength. We expect these buffers will prevail going forward offsetting the economic headwinds.

Banks' conservative risk management practices, high barriers for new entrants, and solid profitability will continue to support the industry's stability. We expect banks' funding structure will remain a strength. Banks will also continue operating under a challenging economy in a highly competitive environment, while preserving solid liquidity and sound capitalization. (see, "Banking Industry Country Risk Assessment: Mexico", Oct. 28, 2024)

In our opinion, the funding risk for Mexican securities firms is somewhat higher than for banks, arising from their lack of access to central bank funding. Moreover, these depend on market liquidity to monetize assets, and in our view, Mexican debt capital markets are moderately broad and deep. Mexican securities firms are regulated with detailed quarterly reporting disclosure by Mexico's local regulator, which also oversees banks. However, we continue to view the overall securities regulatory record as weaker than the banking sector's. In addition, securities firms' revenues and profitability tend to be more cyclical, and they have higher competitive risks compared with the banking industry. There is a high market concentration in the sector, and around 70% of broker firms in Mexico are part of large financial groups.

Taiwan (bb+)

The anchor for Taiwan securities firms is 'bb+', which is two notches below the 'bbb' anchor for Taiwan banks. This reflects our view of the securities sector's incrementally higher economic and industry risks relative to banks.

Economic risk for the Taiwan banking sector remains low by global comparison, reflecting Taiwan's moderately stable economy and strong household net financial position. In our view, Taiwan's robust net external asset position, strong fiscal settings, and monetary flexibility underpin its economic resilience. However, geopolitical tensions with mainland China and external security risk partially mitigate these strengths.

A highly fragmented banking system and competitive distortions due to government ownership constrain Taiwan banks' earnings capacity. Nonetheless, the high proportion of retail deposits in the system should help to maintain banks' access to funding during periods of global economic turbulence. (see "Banking Industry Country Risk Assessment: Taiwan," July 15, 2024).

We believe that securities firms in Taiwan have higher economic risks than banks owing to the securities firms' focus on business linked to the volatile domestic equity market. We also regard the industry risk of Taiwan securities firms as higher than that of banks, given security firms' less stable revenue base that tends to fluctuate with domestic stock market performance. In addition, Taiwan securities firms rely more on wholesale funding than their banking counterparts that have retail and diversified funding sources.

U.K. (bbb-)

Our 'bbb-' anchor for securities firms rated in the U.K. reflects risks shared with the banking sector and risks specific to the U.K. securities sector (see "Banking Industry Country Risk Assessment: United Kingdom", Oct. 23, 2024).

We believe the incremental risk of U.K. securities firms above that of U.K. banks conforms to our standard two-notch adjustment from the U.K. bank anchor (currently 'bbb+'). Specifically, this reflects securities firms' relatively weaker institutional framework, higher competitive risk, and typical lack of access to central bank funding.

While the U.K. institutional framework for securities firms encourages prudential capital, funding and liquidity, and risk management standards, the risks from competitive dynamics and funding are modestly higher than our standard assumption. This is offset by our belief that the U.K. investor insurance scheme and the liquidity of U.K. capital markets result in modestly lower-than-typical incremental funding risk.

U.S. (bbb-)

The 'bbb-' anchor starting point for our ratings on securities firms in the U.S. reflects both risks shared with the banking sector and risks specific to the U.S. securities sector.

Our 'bbb+' U.S. bank anchor reflects our view of economic risk from the U.S.'s diversified, high-income, and resilient economy. The economic risk trend is stable as S&P Global Ratings economists base-case expectation is for the U.S. economy to transition to below potential growth as the Federal Reserve eases monetary policy. We think banks in the country generally have strong enough balance sheets and earnings power to withstand slow growth, or at least a moderate downturn.

Our view of industry risk in the U.S. balances the regulatory enhancements made after the global financial crisis, the relatively good risk-adjusted profitability of the banking system, and the country's deep capital markets against its history of periodic financial crises and complex financial and regulatory system. The stable industry risk trend reflects our expectation of enhancements to regulation following the bank failures of 2023, as well as a declining, but still high share of deposit funding, and our expectation that banks will continue to generate sufficient risk-adjusted profits to build capital. (See "Banking Industry Country Risk Assessment: U.S., Oct 14, 2024).

The securities firm anchor is two notches below the bank anchor to reflect our view of the sector's incrementally higher industry risk relative to banks. These include lower, but still material, regulatory oversight and institutional framework; higher competitive risk; and typically, less stable, more transactional revenue. Also, even accounting for the liquidity of domestic capital markets, differences in assets, and the U.S. investor insurance scheme (The Securities Investor Protection Corp.), funding risk for securities firms is higher than for banks, in our view, because securities firms typically lack central bank access.

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