DBRS Corporate Credit Outlook: Will It Be 1908, 1937 or 2010?
Following the great financial contractions of 1907 and the 1930s, the world saw two very different outcomes,” says Peter Bethlenfalvy, Co-President. The question asked by DBRS in a study published today is what will 2010 look like: back to sustained growth or more grief to come? Looking forward to 2010, a number of key themes are apparent.
(1) How and when governments unwind fiscal stimulus and manage deficits will have a big impact on how 2010 and beyond play out. Governments at all levels will increasingly have difficult choices of whether to cut program spending, increase taxes, continue running greater-than-planned deficits and/or defer debt problems through inflation or devaluation of their currencies.
(2) For most financial institutions rated by DBRS, business and fundamental risk will remain elevated in 2010 but to a much lesser extent than in 2009. Liquidity has been largely restored, risk in legacy assets largely contained and loan losses are beginning to stabilize as economic recovery begins. In some cases, government assistance has been withdrawn and/or programs discontinued. That said, the industry remains fragile, susceptible to a double recession, and commercial real estate will continue to be a challenge for many banks.
(3) In general for the DBRS Corporate rating universe, balance sheets are healthy and liquidity has been managed effectively to mitigate downside risk to capital markets and interest rates in 2010. Cash flow margins have generally been restored, primarily through cost-side management; hence, growth in earnings will be highly dependent on global and domestic economic conditions. That said, barring a shock to the system, we expect healthy cash flow growth in 2010.
“In 2009, financial institutions took the brunt of credit deterioration and its effects were felt system-wide,” concludes Mr. Bethlenfalvy. “We expect 2010 to be less heart thumping. However, the role of governments and the decisions and actions made in 2010 may have the greatest impact on rating changes at DBRS.”
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