Skyline of the financial district

Putting an end to the pandemic won’t mean a quick return to normal for the financial sector, says Fitch Ratings. In fact, the disruption caused by Covid-19 will likely have a lasting impact on the industry.

In a new report, the rating agency said that the economic fallout from the Covid-19 crisis will likely leave lingering after effects that will weigh on financial institutions, and may eventually impact their credit ratings.

Banks and insurers will likely face the most significant effects, it said.

Fitch said it expects the operating environment for banks to “remain challenging long after the pandemic.”

“We expect increased unemployment and economic weakness to pressure asset quality, particularly for lenders with high exposure to SMEs. Weak credit demand and reduced capital market activity will suppress earnings,” it said.

The rating impact of these forces will vary depending on the market and the magnitude of government support for borrowers there, Fitch said.

At the same time, the report noted that government support measures could, in turn, challenge government finances, leading to sovereign credit downgrades, which would have knock-on effects for banks.

“This would put pressure on bank ratings that reflect potential sovereign support — a common feature in emerging markets,” it said.

Ultimately these pressures could lead to some further industry consolidation, Fitch said.

The long-term effects of the pandemic aren’t expected to be as severe for non-bank financials, however.

Fitch said that, while these firms will also face the same tough economic conditions “they are less constrained by regulation than banks.”

As a result, these kinds of firms “may be able to grow in the riskier, but potentially more profitable, segments that banks are likely to avoid in anticipation of asset quality deterioration.”

The report also suggested that the pandemic could lead to the development of government-backed business interruption insurance.

“Given the scale of pandemics and the difficulty of precisely defining related losses due to business interruption, it may be that government-funded solutions will be developed in readiness for future pandemics, perhaps similar to those that apply in some jurisdictions for natural catastrophe losses,” it said.