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Despite the financial stress accompanying high interest rates and slowing economic growth, global financial institutions are enjoying positive credit rating momentum.

Fitch Ratings reported that positive rating actions significantly outnumbered negative actions in the fourth quarter of 2023. There were 63 positive actions in the quarter, including 34 rating upgrades, compared with 29 negative actions, including 11 downgrades.

Just over a third of these rating actions were driven by changes in sovereign ratings, with the rest coming from industry- or company-specific factors.

The rating outlooks for most (85%) global financial firms are stable, with the rest of the outlooks about evenly balanced between positive and negative outlooks, Fitch said.

In a separate report, Morningstar DBRS said it maintains a stable outlook for global financial institutions due to the fact that many firms benefit from high interest rates, despite the uncertain macroeconomic and geopolitical environment.

“Our outlook also takes into consideration an expected deterioration in asset quality and weaker demand for certain financial services amid high interest rates and subdued economic growth,” it said.

The report noted that while new lending typically declines in a high-rate environment, “this is more than offset by higher net interest margins.”

Insurers also benefit from higher rates as they can reinvest maturing assets at higher yields, it said.

The non-bank sectors tend to struggle amid high rates, as funding costs rise and asset quality deteriorates alongside declining loan demand, the report added.

Asset quality will face ongoing pressure in the year ahead, amid weak growth, increased financial stresses, and still-elevated inflation. This will weigh on banks’ corporate lending, “with commercial real estate, construction and consumer sectors being particularly affected,” the report said.

Household credit quality is also expected to weaken, particularly in the unsecured debt segment, it said.

Additionally, geopolitical and macroeconomic risks could weigh on issuers’ credit risk profiles, DBRS said.

Nevertheless, “For the financial institutions sector overall, we expect strong revenue generation in 2024, albeit at lower levels than in 2023,” it said.

While net interest margins have likely peaked in many regions, DBRS also expects fee revenues to rise this year.

Investment banking, asset management, brokerage and the loan origination businesses “should benefit from stronger equity markets, refinancing needs and a decline in long-term rates,” it said.

For the big Canadian banks, DBRS expects “the challenging operating environment to pressure earnings” in fiscal 2024, “with higher provisions for credit losses as credit quality deterioration progresses.”

At the same time, the rating agency said the fundamentals for the big life insurance companies are also expected to remain stable, with strong capital levels and good profitability forecast for 2024 “thanks to their conservative business models, diversified and expansive product suites and a stringent regulatory environment.”