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Financial institutions in emerging markets are expected to witness a negative outlook over 2021 owing to the COVID-19 pandemic and the economic recoveries that will follow as well as political and trade uncertainties, a report by Moody’s read on Monday. 


Moody’s said that while the outlook for banks is negative, insurers are more stable because of the lockdown that resulted in one-off gains, adding that pressure on capital is mounting.


The uncertain trajectory of asset quality is among the biggest risks for banks in 2021, as operating conditions remain fragile amid the ongoing health concerns caused by the pandemic, according to the report.


Moody’s anticipates that 2021 will be a crucial year to determine if more reserves are needed as asset risk elevates, adding that profit growth in emerging markets will be modest amid low interest rates and subdued lending. Lower loan volumes should aid capital, nonetheless.

Funding shifts in response to flatter yield curve dynamics and low rates will also pressure net interest margins, the report said. Sovereign pressures could also weaken overall bank credit profiles. Accelerating digitisation, spurred by mobility restrictions, should lead to longer-term efficiencies, innovation and a larger client base via financial inclusion but also exposes firms to increased cyber risk.


In Africa, asset quality, profitability, and foreign currency liquidity are expected to remain banks’ key pressure points amid the ongoing crisis, according to the report.


It also pointed out that operating conditions across Africa will remain difficult, with economic activity, consumer spending, and government finances severely hit by the consequences of the pandemic.


“These will weaken the banks’ overall financial performance, but also indirectly affect banks’ credit profiles, via their large holdings of government securities, the increased risk of deposit freezes and governments’ reduced capacity to support banks,” stated the report.


Accordingly, any further pressure on sovereigns from the pandemic will weaken banks' credit profiles, revealing that over 90 percent of recent bank rating actions in Africa have followed a sovereign rating action. The phenomenon also holds true of banks in many other parts of the world, continued the report.


However, the report expects an increase in non-performing loans.


“Despite these pressures, the overall financial stability of most banking systems we cover in Africa will be maintained. Capital buffers, stable local currency funding, improved risk management and banking supervision will partially offset the risks. Increased focus on environmental, social and corporate governance (ESG) as well as digitisation will also provide long-term benefits,” Moody’s said.