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NBFIs face increased risks but should remain stable: report

Sep 12. 2019
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By The Nation

The current global economic conditions are affecting non-bank financial institutions (NBFIs) causing them to face increased business risks, according to S&P Global Ratings’s latest report titled “Global Nonbank Lenders Continue To Face Stiff Competition, But Less Stringent Oversight Than Banks” released on Thursday.

The report discusses the risks that global nonbank financial institutions (NBFIs) face and how these risks are reflected in its anchors for these entities. A section reads: “Our anchors reflect our view of the economic and industry risks that NBFIs face in a particular country. We detail our reasoning behind the NBFI anchors for each country where we rate NBFIs. The report covers NBFIs operating around the globe, focusing on 17 countries, including Australia, China, India, Japan, Korea, Mongolia, New Zealand, and Taiwan”.

Operating and financial performance of NBFIs is closely linked to the economic and industry risk conditions in the countries where they operate. During the past few months, trade tensions, -in particular the tariff dispute between the US and China, have cast a shadow on the global economy and financing conditions in all regions. However, central banks stand ready to stimulate growth, and borrowers around the globe continue to enjoy fairly benign credit conditions. S&P Global Ratings believes many countries have their own particularities, which influence the economic performance. In its view, the main risks for fincos are the potential consequences of a slowing global economy, increasing protectionist policies, the possibility for a market correction, and liquidity reversal if financing conditions tighten faster than expected.

On the other hand, industry risks and regulatory frameworks for NBFIs vary not only from region to region but also from country to country. In the majority of countries, regulatory bodies have been demanding fincos implement more stringent requirements, and this is expect this to continue. Nevertheless, these regulations remain less stringent than those of banks, and S&P Global Ratings believes this will remain the case at least for the next one to two years.

While no deterioration in the credit quality of the NBFI sector has been seen following the weakening global economic conditions, S&P Global Ratings believes that market volatility, global trade tensions, declining investment confidence, and unfavourable political conditions in some regions could weigh on their operating performance. US-China friction has broadened from tariffs to technology. Middle East tensions pose a risk to energy markets. These prolonged global tensions have shaken investors’ confidence and have the potential to dent long-term growth. In addition, political challenges in Latin America's largest countries have been materialising, and new administrations in the region are facing waning domestic investor confidence as policy uncertainty prevails. On the positive side, the US Federal Reserve lowered the benchmark rate by 25 basis points in July 2019. In this sense, issuers in many regions stand to benefit from declining benchmark borrowing costs, while fincos' funding costs are likely to decrease and their net interest margins to improve gradually.

“In our view, during the past 12 months, fincos have been able to refinance their debt obligations and maintain their necessary funding and liquidity needs to continue growing. The latter was successful despite the rising interest rates and market volatility due to geopolitical tensions. Nevertheless, market volatility, coupled with lower credit growth in the majority of regions, remains a concern for all fincos, and could weaken financial performance in 2019 and beyond. Asset quality metrics, profitability, and capital indicators may also suffer. NBFIs with lower asset quality and higher concentrations compared with those of peers could face higher credit risk,” the report notes.

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