Pockets of weakness emerge even as most sectors still benefit from relatively benign credit conditions.
Auto, commercial real estate, and credit-card lending are among the “at-risk” sectors we’re watching to gauge asset quality for U.S. banks.
Pockets of weakness for U.S. corporate sectors include consumer products and retail, while the rapid expansion in speculative-grade bond issuance and leveraged lending, as well as covenant-lite deals are vulnerabilities that could amplify credit stresses if lender risk appetites sour.
U.S. states are operating in a stronger revenue environment and yet their fiscal health is challenged by upward pressure on mandatory expenditures for Medicaid, pension contributions, and retiree health benefits costs.
Although European banks balance sheets remain sound, profitability is generally still sub-par. Business conditions are satisfactory for European corporates even as profitability margins in certain sectors appear to be softening due to rising input costs from the labor market.
Companies, especially in the UK and Ireland, would also have to overcome supply-chain bottlenecks if faced with a disruptive Brexit scenario.
In Latin America, political risk continues to weigh on growth prospects for nonfinancial companies and they’re also challenged by depreciated currencies, subdued access to capital markets financing and worsening domestic conditions.
The asset quality outlook for Indian banks remains weak, but this is an outlier amid a trend of relatively low non-performing loans for financial institutions in many Asia-Pacific jurisdictions, including Taiwan, Australia, New Zealand, Singapore, Hong Kong, and Japan.