APAC NBFIs face negative outlook in 2020

Indian and smaller Chinese companies are amongst the most vulnerable.

Intensifying competition with digital firms as well as their exposure to riskier assets underpin the negative outlook for APAC non-bank financial institutions (NBFIs) in 2020, according to Moody’s Investors Service.

Digital distribution are expected to intensify competition and put pressure on margins. Distressed asset management, as well as slowdown in the real estate and infrastructure sectors will also drag revenue down, noted Moody’s.

“Compared to banks, finance companies are more vulnerable to economic downcycles because of higher exposure to cyclical sectors like distressed asset management, real estate and infrastructure,” said Rebaca Tan, a Moody’s Assistant Vice President and Analyst.

“Therefore, we expect the weaker operating environment to heighten these companies’ asset risks, with those that have experienced rapid growth in recent years, such as Chinese distressed asset management companies, more vulnerable to weakening assets than others as their loan books season,” she added.

APAC finance companies’ structural reliance on market funds will also be a key vulnerability in 2020, where Indian and smaller Chinese finance companies’ solvency could come under pressure if they fail to obtain stable funding.

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Similarly, securities companies in APAC will also face a challenging operating environment in 2020, characterized by elevated geopolitical risks and trade tensions.

“As economic growth slows in 2020, the antagonistic geopolitical environment will hurt trading performance and investment sentiment, pressuring securities companies’ profitability,” says Tan.

Notably, digital disruption in the brokerage industry will continue to intensify competition and pressure commission rates.

“Across the region, Chinese and Korean securities companies will face additional profit pressure from falling equity trading volumes across major markets. In Japan, securities companies will continue their restructuring efforts to cut costs in the face of falling brokerage income,” the press release read.

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Securities companies’ higher exposure to riskier assets such as higher-yielding bonds and overseas assets will also present some risks in a less favorable economic environment, Moody’s concluded.