COVID-19 shake-up to last for financial services

Interest rates are tipped to remain severely depressed, eroding profitability as the global economic recession compels central banks to maintained lowered or even negative rates for more years. Governments are expected to be meanwhile driven to increase fiscal stimulus with uncertain long-term consequences and varying implications for banks and insurers. 

The impact of low rates is expected to be greater in regions such as Europe where Moody’s has predicted the yield curve will remain relatively flat coming out of the crisis. 

But there will be beneficiaries of easy money and credit, with investors and mutual funds holding junk bonds to benefit from both Federal Reserve and European Central Bank programs supporting the prices of speculative grade bonds, and money market mutual funds are benefitting from investors seeking safety in short-term government debt.

Social distancing has created a surge in demand for online commerce and contactless payments, with Moody’s forecasting people that have converted to new ways of working and shopping are unlikely to fully return to their old ways when restrictions are lifted. 

Financial services companies are expected to benefit from the working from home trend, as they are expense-heavy information-based businesses, where the worth can be done remotely, presenting an opportunity for cost-savings.

But digital acceleration has also brought risk for incumbents, as the ubiquity and convenience of platforms such as PayPal, Apple Pay or Venmo dominating contactless payments.

Moody’s added the health and economic crisis has raised attention of corporate social behaviour, accelerating a shift in focus to stakeholders.

Asset managers have been reported to see an increased focus on ESG and clients’ scrutiny of their investment actions aligning with such considerations. 

The largest investors and holders of equities, such as sovereign wealth funds pensions, are looking to incorporate broader ESG considerations and to get utility from their assets beyond return.

“Prudential regulations exist partly to balance the natural profit-seeking tendency of capitalistic institutions with the need to maintain financial stability and the wider social good,” Moody’s stated.

“The balance between these two forces has shifted in favour of the latter since the global financial crisis, in response to the perception that the financial industry received an excessive share of economic rents. The shift is now likely to be reinforced in favour of the public good.”

Many banks are offering mortgage and loan relief, mostly in response to political pressure, Moody’s noted, while insurers are under strong pressure from governments and societies to pay coronavirus-related claims not currently covered by existing language.

[Related: Big bank credit losses to far exceed mutuals: S&P]