EMEA emerging market banks to benefit from rising rates
Rising interest rates are positive for banks’ credit profiles in most EMEA emerging markets (EMs), Fitch Ratings says in a new report covering 13 major EMs.
In most cases, the overall impact should be credit positive as higher rates will boost net interest margins, supporting operating profits. However, the positive credit impact will be partially offset by lower credit demand and risks to asset quality due to macroeconomic pressures.
Banks in most of the markets have reasonable ability to pass on higher rates to borrowers. However, in some markets they may be constrained by regulatory restrictions, competitive pressure or asset-quality considerations.
Banks whose funding is dominated by low-cost current and savings accounts will benefit the most from higher interest rates given the limited interest rate pass-through on such accounts. In some cases, good liquidity buffers will limit the pressure to offer higher rates to savers to maintain deposit levels.
We expect asset quality to deteriorate in most of the markets as high inflation and rising interest rates put pressure on borrowers, and economies slow. Credit demand is also likely to weaken.
Some lending segments are more pressured due to their cyclical nature, higher leverage, unhedged FX risk or lingering effects from the pandemic. Central and eastern European (CEE) markets are particularly exposed to the disruption in Russian gas supplies.
Impaired loan ratios are still low, and loss-absorption buffers are generally adequate. However, uncertainty remains about the potential impact of the energy crisis on households and businesses, particularly in CEE markets, while government policy responses are still taking shape.
Banks in commodity-exporting countries have better prospects due to the recent surge in commodity prices, which underpins domestic economies, supporting loan demand and asset quality.
