Economic Recoveries Drive Global Financial Sector Outlooks in 2022
The vast majority of financial institution (FI) sector and subsector outlooks are neutral for 2022, reflecting the expectation for a continued, albeit slowing, global economic recovery and improvement in operating environments for banks, non-bank financial institutions (NBFIs) and (re)insurers, Fitch Ratings says in a report.
Fitch analysts hinted about their expectation that there will be a deterioration in loan asset quality for banks and NBFIs in 2022 as fiscal and policy support wane.
The neutral sector outlook for banks in 2022 underlines a significant change in their operating environment, Fitch Ratings said in an outlook for 2022. According to the global rating firm, a year ago, the outlook was significantly more uncertain, particularly for emerging-market economies.
Fitch Ratings now expects business conditions for banks to be similar to those in 2021, as the global economy continues to recover, although at a slower pace. The firm projects that asset quality will deteriorate moderately in 2022 as fiscal and policy support wanes.
“We expect this to be offset by pre-impairment profitability, accumulated loan impairment allowances and capital buffers”, it added.
It thinks banks will offset these reductions with improved pre-impairment profitability and the reduction of loan loss allowances and excess capital buffers accumulated through the pandemic.
Fitch-rated NBFIs’ solid capital levels and improved funding profiles should help mitigate a moderate pick-up in credit costs, it said in the 2022 outlook.
NBFI operating performance is also expected to be supported by gradually rising interest rates. It is projected that the global tightening of monetary policies will be supportive of life insurer returns; however, the negative impact of historic low rates on profitability will remain for some time.
Low rates have resulted in an increased allocation to higher-risk alternative investments by life insurers, as well as a structural shift toward a more capital-light model, Fitch Ratings outlook indicates.
The economic recovery should result in volume growth in non-life business lines, with pricing discipline expected to continue. Claims are expected to normalise, but costs should rise with inflation.
Meanwhile, economic growth is expected to slow slightly in 2022 but still support credit expansion. Recall that Fitch lowered its global gross domestic product (GDP) growth by 0.3pp to 5.7% late last year.
The global rating firm also trimmed its world growth forecast for 2022 to 4.2% from 4.4%, primarily reflecting a more intense slowdown in China.
Fitch maintains 141 Outlooks for FIs globally, with 80%, or 113 issuers, at Neutral for 2022. Twelve per cent (17) of outlooks are improving and 8% (11) are deteriorating for 2022. # Economic Recoveries Drive Global Financial Sector Outlooks in 2022
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