IACPM: Credit default concerns remain despite slight improvement in quarter

Credit managers continue to believe credit defaults will increase over the next 12 months, although the overall sentiment is continuing to improve, according to the latest quarterly survey from the International Association of Credit Portfolio Managers.

The Credit Default Outlook index for the next 12 months is -31.3, up from -37.9 the previous quarter. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

While the index remains negative, it is the fourth consecutive quarter that sentiment has improved, from a low of -56.2 for the first quarter of 2016.

The credit default index specifically in the corporate sector rose slightly to -28.9 from -29.6 the previous quarter, the best of all sectors, while the average retail/consumer mortgage credit default index rose to -33.6 from -41.3, and the commercial real estate credit default index rose to -31.5 from -43.5.

IACPM breaks down the corporate sector by region, all of which remain negative, although sentiment improved considerably in Asia, whose index rose to -37.5 from -58.8 the previous quarter, and Australia, whose index rose to -19.0 from -26.7. Europe dropped slightly to -38.9 from -33.3 and North America did so as well, to -20 from -13.9.

Som-lok Leung, IACPM's executive director, noted in a telephone interview that a greater percentage of respondents in the survey believe credit conditions will remain unchanged over the next 12 months, compared with those who think they will worsen.

For example, in the corporate sector, 50% of respondents said default rates will remain unchanged, while 40% said they will worsen and 11% said they will improve.

“The index results go a little against my personal feeling about this,” Mr. Leung said, “because there's a lot of uncertainty in the world out there. Brexit was one thing mentioned a lot out there, there's the French election. There's a lot of uncertainty out there but that is not strongly reflected in markets right now.

“Unless and until something changes, it's going to look something similar like we have now,” he said.

The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 90 financial institutions in the U.S., Europe, Asia, Africa and Australia.