JAKARTA (TheInsiderStories) – Solid, though decelerating, global economic growth will continue to support banks’ creditworthiness in 2019, says Moody’s Investors Service in a report published today (12/06). Geopolitical and domestic risks, however, pose the greatest source of uncertainty and risk.

“Growth will still be solid in advanced economies in 2019, though the growth outlook for emerging markets is more cloudy, with tightening monetary policy, rising trade protectionism and slower demand from China,” says Andrea Usai, Associate Managing Director at Moody’s.

He added, “The generally supportive operating environment
overall will help banks to preserve the stronger capitalization achieved in recent years.”

Geopolitical and domestic risks, however, pose the greatest source of uncertainty and risk in 2019, with US – China tensions spreading far beyond trade disputes.

In addition, the risks of a ‘no-deal’ Brexit scenario under which the UK banks’ credit fundamentals would weaken, have increased. Meanwhile, domestic and political risks will continue to weigh on the outlooks for Argentina, Brazil, Italy, and Turkey, with credit-negative implications for their banking systems.

On the other hand, rising interest rates will help improve profitability, providing some boost to banks’ net interest margins, as already seen in the US. Nonetheless, profitability will continue to be a credit weakness for many banking systems, particularly in
Europe, with still low interest rates and elevated cost bases keeping returns on assets and capital modest.

Moody’s also expects financial stability risk to rise following a decade-long period of low interest rates. As monetary policy gradually normalizes in advanced economies, particularly the US, volatility will return to financial markets, a challenge for many banks but also an opportunity for firms with large trading activities.

Stable Outlook for Global Life Insurance in 2019

While, the outlook for the global life insurance sector is stable, reflecting a favorable economic cycle and strong capital levels. Global life insurers have adapted to persistent low interest rates better than expected by exchanging sales of interest-sensitive products for fee-based retirement, savings and health products.

“Rising interest rates in some regions, such as the US and Canada, have been positive credit drivers.However, there is marginal re-risking of investment portfolios, with a gradual move towards lower quality and less liquid assets, such as private credit and alternatives,” said Manoj Jethani, a Moody’s Vice President.

Overall, the balance sheets of global life insurance companies are healthy and capital levels are expected to remain robust in 2019, although some challenges lie ahead. Specifically, RBC ratios are expected to decline in the US due to the impact of tax reform, although this should not affect the credit profile or ratings in the region.

UK and Japanese capitalization is expected to remain solid, although any financial market volatility in the UK as a result of Brexit remains an area of focus. In China, the capitalization of life insurers remain solid, while the refinement of C-ROSS will be beneficial for the insurance industry.

More negatively, the German life market remains under particular pressure, and some insurers face solvency risks if interest rates stay low.

Asset Back Securities Steady in Q3 2018

Then, Moody’s Investors Service says that the performance of auto loan asset backed securities (ABS) was generally steady for Asia Pacific in Q3 2018, with delinquency levels stable for Chinese and Indian transactions, and slightly higher for Australian and Japanese deals.

“Looking ahead over the next year, we expect auto ABS delinquency rates to rise slightly from their low levels in China as the economy slows, while in Australia, they will also increase moderately from low levels, given the increasing proportion of consumer auto loans in the underlying pools,” says Ilya Serov, a Moody’s Associate Managing Director.

In Japan, he continued, default rates will remain low but, in India, its expect delinquency rates, which are higher than in the other three countries, to stay around current levels or increase slightly, with the negative effects of higher fuel prices on auto loan borrowers counterbalanced by strengthening economic activity.

In China, for Q3 2018, the average 30+ days and 60+ days delinquency rates for outstanding auto loan ABS were low at 0.12 percent and 0.04 percent respectively in September 2018, changed from 0.07 percent and 0.03 percent respectively in June 2018.

Overall, outstanding auto ABS continue to perform well, and Moody’s expects average delinquency rates to remain low, but increase slightly from current levels in 2019 as China’s economy slows.

In Australia, the average 30+ days delinquency rate for auto ABS was 2.03 percent in September 2018, compared with 2.02 percent in June 2018 and 1.46 percent in September 2017.

A lower exposure to better performing receivables, such as novated leases, and a higher exposure to worse performing receivables, such as consumer auto loans and leases, has contributed to a moderate increase in delinquencies throughout 2018.

In Japan, the annualized default rate for auto loan ABS increased slightly to 0.69 percent in August 2018, from 0.64 percent in May 2018, but Japanese performance remains strong. The Japanese economy is slowing moderately and growth will decelerate going forward, but strong job market conditions will continue to provide a supportive backdrop for auto loan borrowers.

In India, on an original balance basis, the 30+, 60+, 90+ and 180+ days delinquency rates for the auto loan ABS that Moody’s rates were 5 percent, 2.38 percent, 0.92 percent and 0.18 percent respectively in September 2018, broadly stable compared with 5.48 percent, 2.47 percent, 1.19 percent and 0.17 percent in the previous quarter.

The 180+ days delinquency rate is materially lower than 0.53 percent in September 2017. The 90+ days delinquency rate is at the lowest level since the third quarter of 2016.

Delinquencies are likely to remain at around current levels or deteriorate slightly in 2019, with the negative effects of higher fuel prices on auto loan borrowers counterbalanced by strengthening economic activity.

Written by Staff Editor, Email: theinsiderstories@gmail.com