Coronavirus expected to reshape financial sector

Moody’s Investors Service expects the coronavirus pandemic will deliver far-reaching, longer-term effects that will fundamentally reshape many aspects of the macro economy, business life and consumer behavior.

While many of the longer-term consequences are as yet unknown, Moody’s predicts an enduring impact will be made on financial service providers.

Interest rates will remain severely depressed, eroding profitability. The global economic recession will compel central banks to maintain low or even negative interest rates for several more years and to drive governments to increase fiscal stimulus with uncertain long-term consequences and varying implications for banks and insurers, not least a profit squeeze.

The outbreak will be a powerful catalyst for an accelerated migration to digital processes and services by both consumers and businesses, said Stephen Tu, vice president and senior credit officer at the rating agency.

Within financial services, social distancing has created a surge in demand for online commerce, contactless payments and digital cash transfers.

It is probable that customers who have newly converted to novel ways of working and shopping may not fully return to their old ways when restrictions are lifted, as a result of gains in functionality, user experience and utility.

Likewise, financial service companies stand out as a key beneficiary of the work-at-home trend. They are expense-heavy information-based businesses, in which most of the work can be done remotely, and potential cost savings are considerable.

The health crisis and economic hardship is increasing attention on corporate social behavior, accelerating a shift in focus to a wider range of stakeholders.

Many banks are offering mortgage and other loan relief. They are expected to channel massive public funding toward both the corporate and household sector, with public authorities determining in part the credit criteria, pricing and management of these loans, the report noted.

Insurance companies have been under strong pressure to pay coronavirus-related claims that are currently not covered by existing language, such as business interruption insurance.

And they have also been asked to accept delays in premium payments without canceling coverage and to provide other means of financial relief to their customers.

Asset managers are also acutely aware of the increased focus on environment, social responsibility and corporate governance (ESG) and clients’ scrutiny of their investment actions aligning with such considerations.

The largest institutional investors and holders of equity, notably sovereign wealth funds and pensions, are increasingly seeking to incorporate broader ESG considerations and get utility from their assets beyond investment return.