August 2024 Edition

Welcome to Global Credit Insights. Every month, we bring you the top research insights from Morningstar DBRS, the leading provider of credit ratings and thought leadership on corporate and sovereign entities, financial institutions, and project and structured finance transactions.

Rating more than 4,000 issuers and 60,000 securities, Morningstar DBRS is one of the top four credit rating agencies in the world. To learn more, visit dbrs.morningstar.com.

Global IT Outage: Widespread Disruption to Corporates and Financial Services: Lasting Impact is Limited

The impact of the global IT outage has been widespread, but at this stage we do not anticipate a lasting impact on our rated universe. We analyze the impact on various sectors including airlines, airports, travel insurance, financial services, broadcasters, retailers and consumer products, automobiles, services and business interruption insurance.

Key Highlights

• Widespread disruption across a variety of corporate and financial sectors globally will lead to increased costs in a number of businesses.
• From a credit perspective, we expect the disruption to have a limited impact across our rated universe.
• However, we expect the incident to raise regulatory questions about the oligopolistic nature of critical IT infrastructure globally.

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FDIC Q1 2024 Quarterly Data Shows a Healthy U.S. Banking Sector Despite Some Deterioration in Asset Quality

The Q1 2024 U.S. Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile highlighted quarterly developments for the 4,568 reporting FDIC-insured institutions including an improvement in net income versus Q4 2023, largely because of the absence of the special charge the FDIC levied on banks last year to bolster its reserves after the bank failures in 2023.

Key Highlights

• Net income improved on the absence of special FDIC assessment charges seen in Q4 2023.
• Weakness in CRE and credit card loans drove the decline in asset quality metrics. However, asset quality metrics are still better than pre-pandemic levels.
• Net interest margins decreased, on higher funding costs and slightly lower earning asset yields.

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Stellantis’ Journey Into the Brave New EV World

Stellantis N.V. (Stellantis or the Company; rated BBB (high) with a Stable trend), as with its peers, is steadfastly facing the fundamental transformation of the automotive industry away from internal combustion engine (ICE) vehicles and toward electric vehicles (EVs).

As one of the world’s largest original equipment manufacturers (OEMs) with a meaningful presence across most major regional markets while also holding a portfolio of 14 automotive brands, the Company has considerable flexibility in the development and offering of new EV models.

Moreover, taking into account Stellantis’ strong balance sheet and overall financial risk assessment (FRA), Stellantis appears likely able to sufficiently fund the substantial investments. As such, our ratings on Stellantis remain unchanged as it continues further in this journey.

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China’s Third Plenum Sets Out Policy Direction but Lacks Specifics On Implementation

The Third Plenum of the 20th Party Congress of the Communist Party of China (CCP) was held on July 15–18. Markets had hoped that the meeting would deliver initiatives to address the challenges facing the Chinese economy. However, the Plenum has so far turned out to be heavy on objectives but light on implementation. 

Headwinds to China’s Economy Remain

• We expect China’s debt overhang, the weakness in the property sector, the challenges of its aging demographics, and heightened U.S.-China tensions will translate into lower economic growth over the medium term.
• While we think China’s economic and policy buffers remain sufficient to limit the risk of an abrupt near-term economic adjustment and support China’s A ratings, the latest round of policy prescriptions is unlikely to strengthen confidence in China’s economic outlook.

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India’s Budget Strikes a Good Balance Between Growth and Fiscal Consolidation

Following the parliamentary elections earlier this year, the Indian Finance Minister presented the first budget of the new coalition government today. In our view, the budget does a good job balancing fiscal consolidation objectives while supporting near-term growth and facilitating employment generation. The budget focuses on 9 priority areas, including infrastructure, inclusive development, productivity enhancement in agriculture, and employment and skilling.

• India’s credit rating (BBB (low), Positive Trend) reflects India’s public finance challenges, but at the same time the economy’s high growth potential.
• That said, India’s fiscal deficits—at the center and state level—and level of government debt are higher than its peers in the BBB rating range and remain a key credit weakness.

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European Corporates Going Steady in Mid-Year Review: Stable Outlook Supported by a Strengthening Macroeconomic Backdrop

We have a primarily stable outlook across our European corporate ratings sector coverage for the remainder of 2024 and into 2025. Although considerable uncertainties around the evolution of the macroeconomic backdrop remain, we anticipate European corporate issuers to benefit from a gradual economic strengthening across the Euro Area (EA) as well as the UK.

We note, however, that the current macroeconomic environment, considering only gradually declining interest rates and some persistence in inflationary pressures, continues to pose notable near-term challenges. That said, absent unforeseen geopolitical or macroeconomic event risks, these challenges are already largely incorporated into our current corporate credit ratings and/or are mostly balanced by considerable mitigants both on an individual issuer and sector-specific level.

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EU Countries: Dependence on Chinese Battery Supplies Might Become Achilles’ Heel of European EV Manufacturing

• The transformation of European automotive industries towards electric vehicles (EV) has accelerated. EV manufacturing in EU economies has increased markedly in recent years, partly driven by external demand.
• This, however, has led to a reliance on battery imports from China, the global leader in EV battery production.
• While EV battery production capacities in the EU and the US are likely to catch up over the next years, the supply of EV battery supplies in the longer-term is subject to substantial uncertainty given the still nascent nature of the industry.
• The uncertainties relate to the actual scale of future production increases across different regions, the future position of new producers in the global technology race and their price competitiveness.

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U.S. Banks: What Goes Up, Must Come Down; Deposit Pricing Tailwinds Near

• The U.S. banking industry’s deposit costs have increased each of the last eight quarters. However, deposit betas are now finally reaching terminal levels, in our view.
• The industry’s net interest income (NII) should benefit in the near term given the upcoming tailwinds from deposit cost stabilization, with further benefits likely ahead if the Fed begins to cut rates.
• Although downward deposit costs adjustments have historically lagged the very first set of rate cuts during a cycle, our analysis shows that the benefits from reduced funding costs typically accelerate not long after.
• Overall, we view the improving NII picture, typically the biggest driver of bank earnings, as supportive of our Stable view on the sector and can help offset higher provisioning levels if the Fed does not achieve the expected soft landing.

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Approach to Data Set

The figures above are based on data from Morningstar DBRS’s proprietary database (ratings from January 1, 2023 to July 31, 2024). The data set includes public and private ratings in all sectors. Morningstar DBRS tabulated confirmations, upgrades, and downgrades at the issuer level; as such, where there are multiple debt security ratings, Morningstar DBRS only used the issuer rating or its proxy for corporates, sovereigns, and FIG sectors, and only used the trust rating for its proxy for structured finance. Morningstar DBRS did not include under review or trend change rating actions in the tables.

Rating actions were counted by aggregating ratings across company IDs and taking the mode of the rating action. As such, in some cases ratings activity may be overstated. For example, Credit Suisse Group AG and Credit Suisse Group Finance (U.S.), Inc. will have two unique company IDs and will thus yield two different ratings counts in our data despite being from the same company.

Morningstar DBRS aims to remove the impact of overstating rating activity by issuing subsidiaries and affiliates (together, related entities) on the data set in cases where there is a direct relationship to the parent company’s rating. The objective of this adjustment is to eliminate the impact of migrating a series of ratings that ultimately rely on one entity. Please note that this approach is specific for the purpose of this newsletter, and may not be consistent with other rating activity summaries produced by Morningstar DBRS for other purposes (such as the transition study data tabulated for the NRSRO).