The pandemic has accelerated certain trends that are credit positive for financial institutions, Fitch Ratings said in a release on Tuesday.
“Digitalization and automation should help banks, non-bank financial institutions (NBFIs), insurers and funds to enhance their customer acquisition and retention,” the rating agency said. “Together with remote working, it should also lead to lower costs.”
However, winners and losers may emerge depending on how successful financial institutions are at implementing digital strategies.
For example, “banks will need increasing investment in IT infrastructure, including customer-facing portals, to stay competitive,” Fitch said. It forecast that more banks will acquire fintech startups to meet this challenge.
While NBFIs — such as private lenders, investment funds and non-bank investment dealers — can use technology to gain scale and challenge traditional banks, they face fierce competition.
“[I]ncumbent banks typically have larger IT budgets and existing customer connectivity,” Fitch said. “And NBFIs that become large could face increasing regulatory oversight, which tends to be a drag on earnings.”
While both banks and non-banks can use machine learning and big data to enhance underwriting for lending, Fitch noted that new approaches using this technology may require further testing, as well as care to ensure they don’t result in discrimination.
While insurers that successfully adapt to digitalization reap benefits such as enhanced underwriting, efficient sales and automated claim processes, working from home may result in declining valuations in their commercial real estate investment portfolios, Fitch said — a challenge also faced by fund managers.
“However, we expect portfolio diversification will generally limit the impact, particularly in the long term,” Fitch said.
Investment managers that fail to keep up with technology may experience outflows or slower growth, resulting in a negative rating impact on funds, it said.
As it stands, digitalization and automation aren’t affecting Fitch’s ratings or outlooks because the resulting impact is beyond the agency’s two-year rating horizon.