Outlook for emerging markets insurers stable; negative for banks - Moody’s

Ratings agency Moody's 2021 outlook for emerging markets insurers is stable but its outlook for banks and financial institutions is negative. This is due to the uncertainty in asset risk and challenging operating conditions amid the COVID-19 pandemic.

Moody's report finds that moderate and uneven economic recoveries amid the pandemic as well as political and trade uncertainties pose risks for financial institutions in emerging markets throughout Asia, Latin America, Europe, the Middle East and Africa in 2021.

"The uncertain trajectory of asset quality is among the biggest risks for banks as operating environments remain fragile amid ongoing health concerns," said Moody's managing director Celina Vansetti-Hutchins.

The lockdown has resulted in one-off gains in profitability, although pressures on capital are increasing.

"Profit growth will be modest because of low interest rates and subdued lending, but lower loan volumes should aid capital," added Vansetti-Hutchins. "Additionally, banks' lending and funding shifts in response to flatter yield curve dynamics and low rates will also pressure net interest margins."

The capital is expected to moderately fall in emerging Asia over the next two years, with banks in India and Sri Lanka likely to post larger capital declines without public or private injections.

In the insurance space, Moody's has a stable outlook on most lines of business citing "solid capitalisation", but rising equity allocations will add to investment income volatility.

The operating conditions in the EMEA region will be challenging, it said, adding that insurers might be vulnerable to intensifying pricing competition.

Moody's noted that weak medium-term economic growth will limit Latin American insurers' premium growth, which could lead to softer underwriting practices for certain segments participating in highly competitive markets.