Fitch Solutions Global Pulse Survey

Sixth Edition
August 2020

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 Fitch Solutions Global Pulse Survey | Sixth Edition | Aug 2020

Pulse In Numbers
We continue to partner with our Fitch Solutions key clients to understand the economic, business and banking
sector impacts of the Covid-19 pandemic. This is what survey participants believe are the biggest concerns and
forecasts for the global economy over the next 18 months.

Biggest Economic Concerns 1%

Brexit fallout

55% 15%
Insufficient fiscal
and monetary
5%
Rising populism

of respondents indicated that persistently

negative economic growth was their biggest
economic concern over the next 18 months
policy response
to Covid-19
6% Continued liquidity
shock /volatility spike

Expected Economic Effects Of Covid-19

36%
Persistently negative
of survey 20% economic growth
participants also saw 36% Continued weak
persistently negative business sentiment
21%
economic growth Reduced consumer
as the most significant economic effect of 23% purchasing power
Covid-19 over the next year Other responses

Impact On Business Projections 60%

5th Edition 50%

6th Edition
of respondents indicated that their
firms had made significant downward 40%
revisions to their business projections,
30%

54%
broadly consistent with the 55%
reported in the previous edition of 20%
the Pulse Survey conducted in April
10%

0%
Upward revisions Status quo Short-term downward Significant
to 2020 business (We expect to make revisions but expect to downward revisions
projections it up in H220) recover to near to 2020 business
expectations by year-end projections
2
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 Fitch Solutions Global Pulse Survey | Sixth Edition | Aug 2020

Pulse In Numbers

Changes To The Way

Business Operates No
43% Yes

57%
57%
of survey participants
suggested that the Covid-19
pandemic has permanently
changed the way their
business operates. Of those specifying how,
64% mentioned remote work in their response

US Banking Sector Of Most Concern

US

Not worried about Banking

%
32
Italy

of survey UK
participants are
most concerned about Spain
downside risks in the US
banking sector over the next 18 Germany
months among developed markets 0% 5% 10% 15% 20% 25% 30% 35%

Industry Trends Of Concern

50%

46%
40%

30%

20%

of survey participants cited the 10%

continued economic disruption from
the Covid-19 pandemic as the global 0%
Continued economic Borrower Negative Operational risk /
banking sector’s greatest industry disruption from refinancing risk interest rates Conduct risk
concern Covid-19

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Pulse Survey | Full Report
The Covid-19 pandemic continues to upend the global economy, alongside our professional
and personal lives. Localised outbreaks are driving the global case count higher and keeping
countries and cities in different stages of lockdown.
In the Sixth Edition of The Pulse Survey, conducted between the July 5 and August 4 2020, we maintained our focus on the economic,
business and banking sector impacts of Covid-19. The pandemic has been more widespread and longer lasting than many of us initially
anticipated. And, in recent months, it has become clear that the pandemic’s conclusion is most likely to coincide with a vaccine becoming
widely available. With those considerations in mind, we sought to understand how the pandemic has affected perceptions of risk in the
global economy and the banking sector, and impacted business projections and operating models.

Survey Participants By Geography, Number Of Participants

N/A
1 to 5
5 to 10
10 +
> 20

Source: Fitch Solutions Pulse Survey

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Our survey participants are 448 key clients and decision makers who sit in 78 markets from Nigeria to Hong Kong and the US. They span
industries from Banking and Financial Services (46.0%) to Manufacturing (4.7%) and Pharmaceuticals (4.5%).
Primary Sector Of Survey Participants, %

Agribusiness Autos Banking / Financial Services

Chemicals Construction and Engineering Consumer / Retail
Manufacturing Mining Oil & Gas
Pharmaceuticals Technology and Communications Utilities
Other

Source: Fitch Solutions Pulse Survey

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Pandemic To Change Business Operations Permanently
In order to understand the impact that the pandemic is having on businesses beyond the bottom line, we asked if Covid-19 has
permanently changed the way our clients’ businesses operate - a substantial 56.9% of respondents indicated that it has.

Has the Covid-19 pandemic permanently changed the way your business operates?, %

No
43% Yes
57%

Source: Fitch Solutions Pulse Survey

64.5% of those that specified how the pandemic has changed their business operations identified remote work. These responses ranged
from expectations that attitudes and company policies towards remote work will be more favourable post-pandemic, to greater moves
towards the digitalisation of business processes and an increased focus on technology.
This is particularly interesting given the geographic spread of our participants, with 50 emerging markets represented. A prolonged push
towards more remote work and greater investment in digitalising business practices across emerging markets could have a significant
impact on the structure of those economies over time.

Survey Participants In Emerging Versus Developed Markets, Number Of Countries

Developed
Markets
(28)
Emerging ,
Markets
(50)

Source: Fitch Solutions Pulse Survey

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From a sectoral perspective, the percentage of those who answered “yes” to this question largely mirrors the sectoral distribution of our
survey participants, with Banking/Financial Services accounting for 44.8% of our clients who expect the pandemic to permanently change
the way their business operates. Technology was slightly overrepresented in this answer, with 4.6% answering “yes” to this question, as
compared to the 3.6% who comprise respondents to the overall survey. This likely reflects a business model that is easier to adapt to
changing conditions.
The impacts of prolonged remote work is something our Consumer & Retail team at Fitch Solutions has already begun to explore.
An increase in working from home will change consumer purchasing habits, with some consumer sectors negatively affected.
Below, consumers highlight their post-lockdown priorities.

What Will Be Your First Trip After Lockdown?, %

Visiting family 38%

Get a haircut 12%

Trip to the countryside 10%

Going to the pub 8%

Going to the beach 5%

Visiting a shopping centre 4%

Going to the gym 4%

Going to the cinema 1%

Donʼt know 10%

Other 8%

AA Survey, 19,732 responses from members to its online poll between 14th – 20th April 2020.
Source: AA; Fitch Solutions.

For instance, in Western Europe, where many office workers continue to be urged to work from home, there is likely to be reduced
spending on food services (especially lunch and coffee), with restaurants and cafes located in or near large business centres most exposed.
Disruptions to traditional office work patterns will also dampen drivers for purchases of new clothes, particularly formal wear. We also
expect lower demand for personal care products such as cosmetics and fragrances. Data on cosmetics retail sales in China from March
2020 (when the majority of provinces and cities, excluding Wuhan, had emerged from lockdowns and retail was re-opening) illustrates this
trend. As the Chinese consumer emerged from lockdown the year-on-year decline in cosmetics sales softened only slightly to -11.6% y-o-y
in March 2020 and growth of 3.5% in April 2020. This compares to a contraction of nearly 15% y-o-y in January/February 2020 near the
height of the pandemic in China.

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Negative Growth The Top Concern For Clients
Persistently negative economic growth was by far the biggest economic concern identified by our clients at 54.9%. This is the third
consecutive survey, over a timeframe of December 2019 to August 2020, in which our survey participants indicated that negative growth was
their biggest economic concern. Still, the 54.9% figure is substantially lower than the 84.8% of our clients who identified negative growth as
their biggest concern in the previous edition of our survey conducted near the height of the pandemic in the US and Europe. This likely reflects
a nascent recovery in high frequency data that suggests we have passed the worst of the growth impact from Covid-19 even as the recovery is
likely to be bumpy.

What Is Your Biggest Economic Concern Over The Next 18 Months?, %

60

50

40

30

20

10

0
Persistently negative
economic growth

Insufficient fiscal & monetary policy

response to Covid-19

Other

Continued liquidity
shock/volatility spike

Rising populism

Trade war

Prolonged low oil prices

US engages in a major conflict

(eg Iran, North Korea)

Brexit fallout

Destructive move higher

in the US dollar

Source: Fitch Solutions Pulse Survey

Related to concerns over growth, an insufficient fiscal and monetary policy response was the second-most selected response by our
participants, at 15.0%. A number of participants also specified that their primary concern was a combination of negative growth and an
insufficient policy response.
Of those answering ‘other’ (6.9%), the majority indicated that Covid-19 was their primary economic concern. Our clients’ responses
included the likelihood of additional (and potentially worse) waves of the virus, a longer timeline until a vaccine is widely available and the
pandemic’s effects on economic uncertainty.
Our participants also echoed the above themes in their expectations about the economic effects of the pandemic. 35.9% identified
persistently negative economic growth as the most significant economic effect of Covid-19 over the next year. This was followed relatively
closely by continued weak business sentiment (23.5%) and reduced consumer purchasing power (21.1%), speaking to the broad-based
nature of the downturn and the likelihood of a challenging recovery.

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 What do you expect the most significant economic effects of Covid-19 to be in the next 12 months?
Choose up to two answers, %

21%

36% Persistently negative economic growth

2% Prolonged supply chain disruptions
Increased efficiency of remote work
Continued weak business sentiment
Insufficient dollar liquidity
Reduced consumer purchasing power
23%
9%
9%

Source: Fitch Solutions Pulse Survey

We at Fitch Solutions expect the global economic recovery to be bumpy and uneven. In our August Global Macro Outlook, we forecast
global growth to contract by 3.9% in 2020 before rebounding to 4.0% growth in 2021. Latest data show that Q220 was one of the worst
quarters on record for the global economy. But, we expect that economic activity will pick up over the coming months, with high frequency
data showing a significant rebound in activity in June and July as economies reopened. However, a rising number of Covid-19 cases will
likely cap the pace of the recovery. While we do not foresee the blanket lockdowns that were still in place across much of the world in Q220
being reimplemented, we do anticipate periodic localised lockdowns and restrictions to contain outbreaks.

Some Economies Will Bounce Back Faster Than Others

Real GDP Growth, %
10

-5

-10
2020 2021f 2021-2024f Avg

-15
Italy

Spain

France

UK

S.Korea

US

Canada

Australia

Germany

Japan

Source: Fitch Solutions. f = Fitch Solutions forecast

The global economic recovery will be slightly less robust than it was following the global financial crisis. Our forecast for global growth of
4.0% in 2021 and an average expansion of 2.9% over 2022-2026 is slightly below the 4.5% growth figure recorded in 2010 and the 3.0%
average expansion over the 2011-2015 period.

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Business Projections Revised Down But Stable
A plurality of our clients (54.3%) indicated that their firms had made significant downward revisions to their 2020 business projections.
This is broadly consistent with the 55.5% reported in the 5th edition of The Pulse Survey conducted in April 2020. The percentage of those
citing short-term downward revisions with an expectation that they would recover to status quo by year-end also remained consistent
between April (35.6%) and August (33.5%).
These findings are surprising, as the expected duration of the pandemic and the depth of the global economic contraction have changed
significantly in the last few months. Despite this, our clients’ expectations about their firms’ 2020 business projections have been fairly stable.
Moreover, the percentage of those who expect their firms’ projections will be ‘status quo’ has increased slightly in the last couple of months.

How has this pandemic impacted your 2020 business projections?, %

Upward revisions to
2020 business projections 5th Edition
6th Edition

Status quo: we expect it to make up in H220

Short-term downward revisions but expect to

recover to near expectations by year-end

Significant downward revisions to

2020 business projections
0%

10%

20%

30%

40%

50%

60%
Source: Fitch Solutions Pulse Survey

A small percentage of respondents reported that their firms had made upward revisions to their 2020 business projections at 2.8%.
In specifying what led to their firms’ upward revisions, clients gave insight into a diverse set of sectors and firms that are benefitting in the
current situation, including consultancies focused on business transformation, research and information services providers, and consumer
packaged goods companies.

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Pandemic The Greatest Concerns For Banking Sector
Our key clients remain most concerned about the continued economic disruption from the Covid-19 pandemic for the banking sector
globally, which is consistent with the 5th edition of The Pulse Survey findings. The various second waves of Covid-19 have resulted in
additional shutdowns, which continue to drag on economies and, if they persist long-term, will result in material negative impact to the
banking sector. Further weakening in bank profitability will continue and the benefits of the monetary and fiscal policy measures may begin
to erode if the economic weakness continues over the long term.

Which industry trends are you concerned will have the most negative impact on the global banking sector
over the next 18 months? Choose up to two answers, %

Continued economic disruption from Covid-19

Borrower refinancing risk

Negative interest rates

Operational risk / conduct risk

Weakening underwriting standards

Increasing regulation

Fintech disruption

Shadow banking
0 5 10 15 20 25 30 35 40 45 50
Source: Fitch Solutions Pulse Survey

Borrower refinancing risk came up as the second most cited concern, which is also consistent with the 5th edition of The Pulse Survey. The
worsening credit conditions resulting from the pandemic are likely to make refinancing more challenging, despite persistently low interest
rates. Large bankruptcies and defaults have emerged and will likely continue as the pandemic weighs on economies.

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Banking Sector Downside Risks
We asked our key clients to identify which developed market country’s banking sectors they are most concerned about over the next 18
months. Interestingly, their concerns have shifted to the US; the second highest response was that participants are not concerned about
banking at all. This contrasts the 5th edition of The Pulse Survey, where Italy was at the fore and the US was cited as the second most
concerning country banking sector. Italy was cited as the third most concerning in the latest Pulse Survey.

Which developed market country’s banking sector are you most concerned about downside risks over the next 18 months?, %

USA
Not worried about banking
Italy
Other (Please specify)
UK
Spain
Germany
France
Australia
Portugal
Canada
0 5 10 15 20 25 30 35
Source: Fitch Solutions Pulse Survey

The sharp contraction in US growth in Q220 may have contributed to rising concern about the US banking sector. In addition, banks
have reported weak Q220 profitability and a significant increase in loan provisioning in response to Covid-19. US banks are building their
allowance for credit losses as a result of the weaker credit environment and the loan loss allowance buildup is likely more pronounced due
to the recent accounting change, the Current Expected Credit Loss (CECL) methodology. However, credit quality remains relatively benign
with non-performing loans and net charge-offs relatively flat. As noted earlier, asset quality metrics tend to lag and are likely being masked
by current forbearance as well as monetary and fiscal policies that are supportive to the banking sector. Given these factors, we expect
asset quality deterioration but US banks entered this economic crisis in a far better position than the 2008-2009 financial crisis, dampening
systemic risks.
Surprisingly, a large number of our key clients surveyed are not concerned about banking at all. It is likely that the post-financial crisis
regulatory reforms in the banking sector are contributing to this sentiment. Globally, banks improved capital, built up liquidity buffers,
cleaned up problem loans and reduced riskier activities. While they will face challenges, banks are also benefitting from the regulatory
forbearance and unprecedented monetary and fiscal policy easing.

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The charts below show how global Global Systemically Important Banks (GSIBs) have improved capital and liquidity significantly from
YE2010 to YE2019.
GSIBs’ Tier 1 Capital Ratio, % GSIBs’ Loan To Deposit Ratio, %
18 100
16 90
14 80
70
12
60
10
50
8
40
6
30
4 20
2 10
0 0
2010 2019 2010 2019
APAC EMEA North America APAC EMEA North America
Source: Fitch Solutions Source: Fitch Solutions

In the 5th edition of The Pulse Survey, Italy came in as the developed market banking sector with greatest potential downside risk. Italy’s
already weak economic outlook and relatively high NPLs pre-Covid-19, make it particularly vulnerable to a downturn. Despite strong
progress in addressing problem loans, asset quality problems will likely drag on despite fiscal measures, such as Italian government
guarantees for SMEs. Countering some of the benefits of these fiscal measures will be mortgage relief programs that allow borrowers to
delay or reduce loan repayments. We expect regulatory forbearance, temporary capital and liquidity requirement reductions to also provide
short-term relief to the banks, but they will extend the duration of these asset quality and earnings problems in the longer term.

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Asset Quality and Bank Profitability at Risk
Consistent with the 5th edition of The Pulse Survey, participants ranked asset quality deterioration from slowing global growth as their
greatest concern for banks – a concern that we share. For countries that had strong asset quality going into the pandemic, such as the US,
the UK, many Northern European countries and developed APAC, they have sufficient room to accommodate asset quality weakening.
However, other countries that were making progress in addressing problem loans, such as Italy and Portugal, have less ability to absorb
deteriorating asset quality.
We believe that asset quality deterioration is inevitable, which is typical on the back of economic downturns, but it is a lagging indicator. The
unprecedented loan and regulatory forbearance, and monetary and fiscal measures implemented across the globe, will also potentially mask
the extent of the asset quality issues in the near term. However, the stimulus will likely delay rather than avert a deterioration in asset quality,
such that even as the global economy begins to rebound, banking sector data will likely reflect the depth of these issues for some time.

Given the slowdown in global growth, please rank in order your greatest concerns for the banking sector globally
(1 being of greatest concern, 7 being of least)
1 Asset quality deterioration
2 Further decline in bank profitability
3 Capital deterioration
4 Regulatory forbearance masking depth of banking sector problems
5 Liquidity shortfalls
6 Solvency of Country X banking sector (Please specify country)
7 Other

Further declines in bank profitability ranked second among greatest concerns from the slowing global growth by survey participants. Given
the decline in profitability across most regions, it is evident that bank profitability has been a challenge for European and many APAC banks.
However, US banks have seen relatively strong profitability, which we are already beginning to see weaken as a result of the pandemic. The
chart below compares global GSIBs’ profitability by region from 2010 to 2019.

GSIBs’ Return On Equity, %

12

10

0
2010 2019
APAC EMEA North America
Source: Fitch Solutions

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Conclusion
Insights gained through partnering with our key clients from around the world continue to provide an invaluable window into how
perceptions of banking sector and economic risk are evolving. With the timeline of the pandemic having lengthened in recent months and
the economic contraction having deepened, our clients expressed continued concern about the effects of persistently negative economic
growth and ranked asset quality deterioration as their biggest concern for banks. A majority of our clients see the pandemic permanently
changing the way their business operates, largely with an increased focus on remote work.
For additional research on the topics covered in this report, and many more, please visit our Coronavirus Topic Page on Fitch Connect.

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About Fitch Solutions
Fitch Solutions provides credit and macro intelligence solutions helping clients to excel at managing their counterparty risk, gain deeper
insights into the debt and fixed income markets, and get comprehensive intelligence about the macroeconomic environment. Our solutions,
powered by Fitch Connect, are built on our history of credit, macro and industry expertise to help you make more informed business decisions.

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