Asian markets get the nod for fintech industries

PETALING JAYA: Emerging Asian markets stand ahead of other emerging markets for financial technology (fintech) industries, presenting both opportunities and challenges for incumbent banks, according to Moody’s Investors Service.

The international financial research company, which is upholding its stable outlook stance for Asia-Pacific (Apac) banks, said financial inclusion is relatively high across the region and would provide some defence for incumbent banks but risks would remain. “Payment platforms are eroding bank fees as their convenience attracts customers.

“Buy Now, Pay Later service providers are also now entrenched in many markets and growing rapidly in others, displacing traditional personal finance.

“Digital only banks continue to grow with the advantages of newer and less complicated technology stacks and lower cost bases,” Moody’s said.

Meanwhile, it noted that Apac banks are finding ways to partner with fintech providers to gain access to new technology and as a means of defending and maintaining their own customer bases.

Moody’s said on the whole, the outlook for Apac banks is stable premised on relatively stable economic conditions, high loss buffers and improving profitability.

It said the economic outlook remains supportive of banks’ growth and credit worthiness, even while moderating. Although asset risks would rise, credit costs would increase only modestly, as banks maintain high loss absorbing buffers.

Banks’ profitability would improve with higher interest rates, hence supporting capital generation, Moody’s said, noting that other drivers of a stable outlook include strong funding and liquidity profiles, with low levels of market funding.

However, it cautioned that certain scenarios could change its stable outlook to negative. They include deep recessions in numerous markets with the prospect of stagflation, acute asset quality deterioration leading to sharply lower profitability and a weakening capital and liquidity.

It also pointed out that economic growth in the region would remain stable despite rising interest rates.

Moody’s noted that the real gross domestic product growth for many Apac markets would moderate but remain healthy.

It said the tight labour market conditions in advanced Asian markets would buffer the impact of high inflation and rising interest rates.

In terms of asset quality, the financial research firm expects asset quality to weaken but said deterioration would be manageable.

“Easing economic growth, higher interest rates and high inflation will lead to a modest increase in problem loans.

“However, the increase in problem loans will be manageable as economies recover throughout 2021 and 2022,” Moody’s said.

On another note, it said loan loss reserves relative to problem loans are very high for most Apac banks, providing a strong buffer against potential loan losses.

“Loan loss reserves are higher than pre-pandemic levels as banks have not released all reserves built up during 2020 and 2021.

“On average, they are 30 percentage points higher than 2019 levels. Banks in emerging Asian markets generally maintain higher loan loss buffers relative to those in advanced Asian markets,” it said.

Capital strength for Apac banks would be maintained as conditions weaken, it said, adding that improving profitability would support capital ratios and capital levels would match growth in risk weighted assets.

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