The coronavirus pandemic ushered in a low interest rate environment around the world that helped keep economies at least partially afloat.
According to Fitch Ratings, longstanding ultralow interest rates in major developed markets are likely to persist in a post-pandemic world due to economic weaknesses brought about by the virus. That’s good news for consumers, but bad news for financial institutions globally.
Fitch says this will be moderately credit-negative for banks, nonbank financial institutions (NBFIs) and insurers, but less significant for funds. The ratings agency does note, however, that the possible rating impacts are beyond its typical two-year rating horizon and therefore do not affect current ratings or outlooks.
Due to the ultralow interest rate environment, net interest margins (NIMs) for banks in developed markets may be squeezed long after the pandemic. This will likely affect smaller, less diversified banks, which rely more on interest profits, whereas larger banks rely more on fee-based revenue and may thus be protected from such bottom-line hits.
Fitch says these smaller, less diversified banks may struggle to remain profitable without taking extra risk, such as lending to riskier segments or over a longer duration. As history has shown, pressure on profitability will likely drive cost-cutting — and even consolidation — for financial institutions, dependent upon the market in which they operate.
In the nonbank sector, Fitch research shows that developed-market based finance and leasing companies will be most affected by these longer-term low interest rates — all due to NIM compression. Retail brokers with NIM exposure will be more affected than other securities firms.
Fitch says the impact on financial market infrastructure should be limited, but the agency warns that international central securities depositories — and US-based trust and processing banks — could be more affected.
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