Emerging markets sign against economy background with graph and coins stock photo
iStock/Maria Vonotna

As credit conditions continue to deteriorate, credit rating downgrades outnumbered upgrades for global financial institutions in the fourth quarter, Fitch Ratings reports.

The rating agency cited the effects of the global economic slowdown and negative sovereign rating actions in emerging markets as the reasons for downgrades continuing to outpace upgrades among financial institutions.

In the current environment, high inflation is putting upward pressure on financial firms’ operating expenses. At the same time, the increase in interest rates is raising funding costs for banks and other firms that rely on wholesale funding, and weighing on business volumes, Fitch noted.

Additionally, as credit quality declines, loan loss provisions are expected to increase, it said.

“We expect the weakening economic environment to put pressure on [financial institutions’] financial profiles over the next several months, potentially leading to further negative rating actions,” it said.

At the same time, negative rating outlooks in certain emerging-market sovereigns also raises the risk of downgrades in the banking sectors of those countries, Fitch noted.