March 2024 Edition

Welcome to Global Credit Insights. Every month, we bring you the top research insights from Morningstar DBRS, the leading provider of credit ratings and thought leadership on corporate and sovereign entities, financial institutions, and project and structured finance transactions.

Rating more than 4,000 issuers and 60,000 securities, Morningstar DBRS is one of the top four credit rating agencies in the world. To learn more, visit dbrs.morningstar.com.

Global 2024 Sovereign Credit Ratings Outlook

Although we expect growth to either remain weak or further weaken in 2024, we have Stable trends across nearly all of our sovereign rating coverage. In Europe, growth slowed in 2023 amid higher energy prices, elevated borrowing costs, and structural challenges, particularly in Germany. For 2024, growth in Europe is expected to improve, but remain relatively lackluster.

Outside of Europe, growth has been stronger in 2023, given more favorable energy market conditions, higher real income growth, strong immigration flows, and resilient household balance sheets. Looking forward to 2024, however, growth is expected to slow. Prospects for a soft landing have clearly improved, but political uncertainty and other potential vulnerabilities may arise over the course of the coming year. Commercial real estate markets are an important source of risk, and the potential for financial system stresses remains a concern.

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UK Budget 2024: Modest Fiscal Loosening

In the UK Spring Budget 2024, the last one before the next general election, the government announced cuts to national insurance contributions and another freeze in fuel duty, to be partly offset by new taxes and reforms to the non-domicile regime.

On the fiscal outlook, in addition to weaker-than-expected growth and the sensitivity of public finances to interest rates, the fiscal forecast is exposed to adverse developments in tax revenues or increased pressures on spending, which could leave the government with an even tighter fiscal headroom against the fiscal rules.

Moreover, uncertainty over the fiscal outlook also increases in view of the electoral cycle. With the government debt ratio projected to fall only after the next general election (due to be held by January 2025), uncertainty over the debt trajectory is high as the fiscal path is susceptible to policy changes in the run-up to the election and afterwards. The commitment of the government to reducing the fiscal deficit and lowering the public debt ratio remains key for policy predictability. Our sovereign rating for the UK remains at AA with a stable trend.

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Morningstar DBRS Comments on New York Community Bancorp

New York Community Bancorp, Inc. (NYCB or the Company; rated BBB with a Negative trend) reported a number of changes with management and new hires as well as a the restatement of 4Q23 results to also include a large goodwill write-down. More substantially, the Company reported weakness in its internal controls highlighting ineffective oversight, risk assessment, and monitoring activities of its loan portfolio.

We do not anticipate taking an additional credit rating action based on these recent announcements by the Company. However, additional missteps in managing operational and reputational risk that negatively impact franchise strength would result in a credit ratings downgrade. Additionally, the credit ratings would be downgraded if NYCB is unable to maintain deposit funding at a reasonable cost, or reports another outsized loan loss provision.

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U.S. RMBS Frontline Perspectives

In the latest February RMBS investor statements, overall delinquencies (DQs) across the major U.S. RMBS asset classes were mostly lower month over month (MOM) as the rising trend from the past few quarters seems to have stalled for now. Benchmark Treasury yields backed down last week from February's near-term highs, but the 30-year mortgage rate kept creeping higher, rising 4 bps WOW to 6.94% according to Freddie Mac's most recent Primary Mortgage Market Survey data release (February 29, 2024). In the midst of the spring home buying season, the latest housing and mortgage data looks modest so far.

RMBS deal activity for February ended up at $8.4 billion in pricings, just slightly above the $8.2 billion total in January (according to data from Finsight), even with the annual SFA industry conference providing a brief hiatus at the end of February.

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Women in Government and on Corporate Boards – Signs of Progress

For our analysis, we sampled companies from the 2023 edition of the Forbes Global 2000—a list of the largest 2,000 corporations in the world—to observe progress made in the Group of 10 countries (G-10, which in fact includes 11 countries) over the course of a decade.

At large corporations, the average share of women on boards of directors in our sample has doubled. At the government level, in some countries, equality of female and male roles has been attained, but this is not quite the case for country groups of large companies. Despite observable progress overall, the top jobs seem out of reach and female heads of state or top corporate leaders, e.g., Chair, CEO, or CFO, are rare.

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European Women’s Football: Kicking Through the Barriers to Financial Sustainability

Saturday, February 17, 2024, the Women's Super League (WSL) attendance record was broken as 60,160 tickets were sold for the match between Arsenal and Manchester United at Emirates Stadium in London. This is the latest in a string of record-breaking attendances at women's football matches that includes the 2023 FIFA Women’s World Cup (WWC), where one-third of the matches recorded attendances of more than 40,000 spectators and stadiums averaged 84% capacity utilization. The growth in interest in women's football is being monetized through matchday, media/broadcasting, and sponsorship revenues.

Union of European Football Associations (UEFA) has lofty expectations for the business of women's football and projects the annual commercial value in Europe to grow by almost six times to EUR 686 million in 2033 from EUR 116 million in 2021.Revenues are expected to grow across all business segments, namely matchday, media/ broadcasting, and sponsorship.

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European Banks’ Office Loans: More Price Declines are Likely

With few exceptions, office vacancies across Europe have been on the rise for some time. In our view, it is unlikely that they will return to pre-pandemic levels soon. However, some support to the sector has come from more firms requiring employees to return to the office, a trend we expect to continue. The average vacancy rate for 7 large European financial hubs was up by 158 bps YOY to 10.4% in Q4 2023, according to CBRE data.

In our view, a further downward revision of office values and prices is likely, especially for lower quality, dated, poorly located and less energy-efficient buildings, which are in need of investment in refurbishment or reconversion. As a result, banks will likely experience further upward pressure on LTVs, leading to higher risk-weighted assets and loan loss provisions.

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