In this latest brief from the Credit Benchmark Research Team, our analysts delve into post-Brexit vote views of credit risk amongst British corporates and financials vs. their European peers. The team has looked at contributed data from the world’s leading IRB and CCAR regulated banks to gauge key consensus trends in the sector.
Corporates: U.K. vs. Continental Europe
As we see in Exhibit one, the average Probability of Default (PD) of 423 UK corporates covered by Credit Benchmark increased from 72 Bps to 82 Bps over the last 14 months. This might be perceived as an increasing vote of “no confidence” by the global banks contributing to the Credit Benchmark universe. On the other hand, Credit risk of European corporates has been stable; the average PD of 279 European corporates decreased from 63 Bps in June 2016 to 57 Bps in July 2017 – a consensus uptick in optimism from the banks for the rest of Europe, in spite of Brexit.
Financials: U.K. vs. Continental Europe
We see a similar trend in Financials. In the last 14 months, the average PD of 200 UK financials increased from 40 Bps to 43 Bps whereas the average PD of 328 European financials decreased from 101 Bps to 83 Bps.
Both sets of trends indicate that perhaps the impact of the Brexit vote has been more negative for the UK than for the rest of developed Europe.
Exhibit 1 Average PDs of UK vs European Corporates and Financials
Comparing Large & SME Corporates and Financials + Other Key Industries
For additional context, exhibits two and three below show the credit quality changes for Large and SME Corporates and Financials as well as for selected industries.
Exhibit two shows that both large and SME corporates have experienced a deterioration in credit quality, and this is especially marked for SMEs. The credit risk of large financials remained almost stable, whereas the average PD of SME financials increased significantly.
Exhibit 3 shows differences among the industries with at least 20 entities in quorate sample. The average PD increased most for Oil and Gas (from 188 Bps to 246 Bps), Industrials (from 61 Bps to 70 Bps), Basic Materials (from 66 Bps to 74 Bps), and Utilities (from 20 Bps to 22 Bps).
Conclusion
As summarized in exhibit four, the increase in credit risk appears once again larger in the UK. The Oil & Gas industry in the rest of the EU has started to improve, but the credit deterioration continues in the UK. Further, European Consumer Goods and Basic Materials show an improvement in credit quality but the sector has significantly deteriorated in the UK. And while Industrials show a negative trend in both the UK and Europe, the downward trend is more marked in the UK.
Exhibit 4 12 Month Percentage Change in Average PD for UK and European Industries
Is this a sign of long-term trends, or will the banks shift their views of credit risk as the true impact of Brexit becomes apparent across Europe? The Credit Benchmark Research Team will continue to monitor.
For further explanation or a deeper dive into the Credit Benchmark data universe, contact us
[email protected].
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