What are the key themes that we believe will shape the financial industry in the second half of 2021 and beyond?
1: Credit quality
Government stimulus programs have significantly mitigated the economic impact of the pandemic, but credit quality could be worse in some countries than others amid an uneven recovery.
U.S. credit losses are expected to be manageable as the economy shifts from relief efforts to growth mode. Many US banks are increasingly optimistic about the economic outlook. Their earnings outlook remains gloomy due to weak credit demand and excess liquidity. But as the recovery matures, banks expect loan demand to pick up, perhaps in the second half of the year.
Markets are waiting to see if asset quality is deteriorating faster in Spain, Italy and Portugal — tourist hotspots that have been hit hard by COVID-19 — than in Northern Europe. Many emerging markets in Asia-Pacific are still struggling with vaccine lockdowns and delays. Limited ability to ease the fiscal response and a resurgence of the coronavirus could pose headwinds in countries like India. Asset quality risks will be felt once the renegotiation measures are lifted.
2: Mergers and Acquisitions (M&A)
Mergers and acquisitions are a priority for many financial institutions, now more than ever, as they seek efficiency in this challenging environment. Low interest rates have hampered the earnings potential of companies, from banks to life insurers.
The insurance industry has attracted a lot of interest from private equity buyers, as these investments provide permanent capital and generate a steady stream of fees.
Mergers and acquisitions could remain robust in APAC as regulators in major economies like China and India ease rules for participation of foreign financial institutions. At the same time, growing competition from domestic consumer banks could prompt international banks to rethink their operations.
3: The Rise of Special Purpose Acquisition Companies (SPACs)
The SPAC market exploded in 2020. Blank check companies offered private companies an alternative to go public when market volatility increased during the pandemic. But the enthusiasm has faded as SPACs face questions about their accounting methodology and their targets’ revenue projections. Surveillance is likely to intensify in the United States
In Europe, more SPAC-related activities are expected in Amsterdam and London. Asian countries including Singapore, Hong Kong, Indonesia and Japan are considering changing regulations to allow SPAC registrations.
4. Low rates and jokers
Over the coming year, financial institutions of all types will be watching rising—but still small—interest rates.
In the United States, further stimulus — and earnings pressure — could come from the Biden administration’s infrastructure proposal, which would likely lead to a hike in the corporate tax rate.
Other wild cards could include further geopolitical and social unrest, disaster-related losses and a more widespread resurgence of COVID-19.