Moody’s Investors Service said recently that its outlook for APAC non-bank financial institutions (NBFIs),which highlights the key credit trends shaping finance and securities companies in 2020, is negative.
“Compared to banks, finance companies are more vulnerable to economic downcycles because of higher exposure to cyclical sectors like distressed asset management, real estate and infrastructure,” noted Rebaca Tan, a Moody’s assistant vice president and analyst.
“Therefore, we expect the weaker operating environment to heighten these companies’ asset risks, with those that have experienced rapid growth in recent years, such as Chinese distressed asset management companies, more vulnerable to weakening assets than others as their loan books season,” she added.
In addition, APAC finance companies’ structural reliance on market funds will be a key vulnerability in 2020, where Indian and smaller Chinese finance companies’ solvency could come under pressure if they fail to obtain stable funding, according to Tan.
Similarly, securities companies in APAC will also face a challenging operating environment in 2020, characterised by elevated geopolitical risks and trade tensions, she said.
“As economic growth slows in 2020, the antagonistic geopolitical environment will hurt trading performance and investment sentiment, pressuring securities companies’ profitability,” Tan pointed out.
Notably, digital disruption in the brokerage industry will continue to intensify competition and pressure commission rates, according to Moody’s.
Across the region, Chinese and Korean securities companies will face additional profit pressure from falling equity trading volumes across major markets. In Japan, securities companies will continue their restructuring efforts to cut costs in the face of falling brokerage income, the rating agency said.
Securities companies’ higher exposure to riskier assets such as higher-yielding bonds and overseas assets will also present some risks in a less favourable economic environment, Moody’s added.