Near-term risks to the global banking sector have diminished, but the longer-term outlook remains overwhelmingly negative, Fitch Ratings reports.

The rating agency reported that almost 60% of bank ratings remained under a negative outlook at the end of 2020. This represented a modest improvement from the end of the first half.

The high share of bank ratings with negative outlooks “may persist well into 2021,” Fitch said.

At the same time, the rating agency reported a sharp drop in the proportion of ratings that are on rating watch negative, which indicates near-term risks.

The proportion of ratings on negative watch fell from 10% at the end of the first half to just 1% by the end of the year.

“While immediate risks to bank ratings after the onset of the coronavirus pandemic have been largely avoided, medium-term risks remain from the gradual withdrawal of government support for the economy and for borrowers,” the report said.

“A slower-than-expected economic recovery due to recurring lockdowns or vaccine deployment setbacks could exacerbate these risks.”

In the second half of 2020, there were 29 bank downgrades and nine upgrades, Fitch reported. These moves were largely linked to changes in sovereign ratings.

By region, Latin America had the highest proportion of banks on negative outlook/watch (87%) at the end of 2020, Fitch said.

In North America and the Asia-Pacific region, that share was lower, at 60% and 55%, respectively.

“While banks in these markets face similar risks to those in other regions, they generally have more headroom in their ratings,” Fitch said.