Fitch Ratings: Negative actions outweigh positive

A recent report by Fitch Ratings has shed light on the challenging global economic landscape faced by banks, with negative rating actions outweighing positive actions in the first quarter of the year. CNBC Africa had the opportunity to sit down with Mahin Dissanayake, Head of African Bank Ratings at Fitch Ratings, to delve deeper into the implications of these findings for African banks. Dissanayake highlighted the impact of high inflation, the Russia-Ukraine conflict, and the looming threat of stagnation as key drivers of the negative rating actions globally. While the African banking sector has not experienced the same severity of impact as other regions, Dissanayake warned that the continent is not immune to the challenges posed by inflation and slow growth. With limited flexibility for sovereigns to reverse these trends, African banks are bracing for a difficult year ahead. Inflation and slow growth are expected to put pressure on banks' profitability and increase credit costs, creating a challenging operating environment. While historically higher interest rates have benefited banks by improving margins, the current scenario poses risks of default as consumers and corporates struggle to service their debts. Central banks in Africa are walking a tightrope between addressing inflation and maintaining economic growth, with measured rate hikes being crucial to avoid derailing the economy. The outlook for African banks remains stable for now, but the looming specter of downgrades looms as global conditions worsen. Countries that are net commodity exporters like South Africa may benefit from higher commodity prices, but this could also lead to higher subsidy and social security costs, impacting the overall economic landscape. Fitch's recent shift in South Africa's rating from negative to stable reflects the potential positive impact of favorable macro conditions. However, the overall outlook for banks remains clouded by uncertainty, with climate risk emerging as a critical factor influencing ratings. The recent floods in East Africa have highlighted the importance of climate risk management for banks, with exposure to industries vulnerable to environmental changes posing a significant threat. Fitch's assessment of banks' ability to withstand climate risk plays a crucial role in determining their rankings. Overall, African banks are navigating a complex and turbulent environment amidst global economic challenges, with climate risk management emerging as a key focus area for sustainable growth and resilience.