Negative 2021 outlook for EM’s financial institutions amid recovery

MODERATE and uneven economic recoveries amid the coronavirus pandemic as well as political and trade uncertainties are posing risks for financial institutions in emerging markets (EMs) throughout Asia, Latin America, Europe, the Middle East and Africa in 2021.

This has prompted Moody’s Investors Service to render the outlook for banks as negative with insurers being more stable as lockdown from the pandemic has resulted in one-off gains.

“The uncertain trajectory of asset quality is among the biggest risks for banks as operating environments remain fragile amid ongoing health concerns,” Moody’s managing director Celina Vansetti-Hutchins pointed out.

She was referring to Moody’s latest report entitled Financial Institutions – Emerging Markets: 2021 Outlook Negative as Operating Environments Heal from Pandemic and Asset Risk Remains a Wild Card.

“Profit growth will be modest because of low interest rates and subdued lending, but lower loan volumes should aid capital,” noted Vansetti-Hutchins.

“Additionally, banks’ lending and funding shifts in response to flatter yield curve dynamics and low rates will also pressure net interest margins.”

In Asia-Pacific, banks’ rising non-performing loans and insurers’ volatile investment portfolios are in focus, according to the report.

Capital will moderately fall in emerging Asia over the next two years with banks in India and Sri Lanka posting larger capital declines without public or private injections.

In the insurance space, China is the most relevant player in emerging Asian markets.

Moody’s has a stable outlook on most lines of business given solid capitalisation, but rising equity allocations will add to investment income volatility.

In Europe, the Middle East and Africa, operating conditions will be challenging. In Africa, asset quality, profitability and foreign currency liquidity will remain banks’ key pressure points.

“Across the Commonwealth of Independent States, large loan impairments will increase because of the double economic shock of the pandemic and oil price slump,” projected the credit rating agency.

“Pressure on fundamentals will also carry over to Central and Eastern European banks, but economies contracted more mildly than European Union peers and are set for a stronger recovery in 2021.”

Gulf Cooperation Council banks may get a boost from large projects like the Dubai World Expo 2020 and FIFA World Cup 2022 in Qatar while insurers are vulnerable to intensifying pricing competition, added Moody’s. – Nov 30, 2020

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