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The initial worries over global banks’ credit quality amid the economic effects of Covid-19 have eased a bit, but the long-term outlook remains cloudy, Fitch Ratings says.

In a new report, the rating agency said that the near-term risks for many of the banks that were placed on rating watch negative (RWN) due to the immediate fallout from the pandemic have since abated.

Fitch noted that the the balance of rating watches and outlooks on global banks turned sharply negative after the Covid crisis initially emerged — jumping to 60% negative in the first half, from just 13% negative at the start of the year.

By the end of the first half, there were 10% of global banks on RWN, which marked its highest level in recent years.

“Banks placed on RWN were typically those that entered the crisis with limited headroom at their rating level, or with above-average exposure to asset classes that we considered likely to be more volatile,” said Fitch.

However, by the end of the third quarter, the share of banks on RWN was down to 5%, Fitch noted.

The initial risks to banks’ ratings “were largely avoided,” Fitch said, as markets stabilized and governments provided extensive support to households and businesses, preventing a severe deterioration in asset quality.

Yet, while the share of banks on RWN has dropped, most of those banks now have negative outlooks, the rating agency said.

These negative outlooks “could remain in place well into 2021 as government support for economies and borrowers is gradually removed and as impaired loans rise over a potentially drawn-out period,” Fitch said.