Lending in 2021, how the year looks for the credit market

The Covid-19 pandemic and subsequent lockdowns brought dramatic changes to the global economy. The World Bank predicted that the global economy would contract by up to 5 % while the global per capita income could see a historic contraction, the largest since 1870s. The financial sector, most notably the credit and lending markets, are some of the most gravely affected sectors by the pandemic. According to a report by Securities and Exchange Commission of US, the Short Term Funding Market (STFM) suffered immediate stress after the imposition of lockdown in March 2020.


Another study by the IMF has projected that the global public debt during the Covid-19 crisis will exceed the post World War II peak. The same study also predicts that the cumulative global losses in 2020 and 2021 will soar past $12 trillion. However, the global economy is steadily getting back on track, and the lending market will be at its centerpiece, with a slightly different outlook.


Few Key Statistics

Transunion conducted a study to ascertain the impact of the Covid-19 pandemic on the consumer lending industry and came forward with some interesting findings. Here are a few of the statistics found in the study.


  • The auto loans sector saw an increase in the number of loans from 2019. In the 2nd quarter of 2019, a total of 82.7 million auto loans were given, this number rose to 83.5 million in the 2nd quarter of 2020.

  • In the same period, the average debt per borrower increased from $18,974 to $19,457.

  • The number of credit cards in Q2 of 2019 was 437.1 million which rose to 451.5 million in 2020’s 2nd quarter.

  • The total balances for unsecured loans grew from 148 billion Q2 of 2019 to 156 billion in the 2nd quarter in 2020.

  • The number of mortgage loans crossed the 50 million mark in 2020 after staying in the range of 49 million for three consecutive years.

  • Also, the average debt per borrower for mortgage loans increased from $209,402 in 2019 to $215,178 in 2020.

What are the trends?

Credit experts believe that banks and other financial institutions will follow certain trends to stay profitable in 2021. Here are some of the trends for the credit industry in 2021:-


Central banks will keep funding costs low

Central banks will try their best to keep funding costs low for the entire 2021, and this may even extend well into 2022. As the road to economic stability and recovery lengthens, the solvency risks associated with “B” rated and below issuers will slide into the low-risk zone. Furthermore, central banks will continue to support markets in 2021, however, this support will likely be in the form of passive assistance, like policy guidance, instead of active measures like a monetary and fiscal stimulus.


Governments will begin fiscal consolidation

Most governments implemented fiscal stimulus to support their economies and help in the recovery process. However, the size and configuration of the stimulus vary significantly with the financial health of governments. In 2021, countries will begin the process of fiscal consolidation and further catalyze the recovery process. Also, the economic growth could be hindered by debt stocks that are expected to remain elevated for the foreseeable future. However, by 2022 debt burden levels will start to stabilize as fiscal flows will look similar to the pre-pandemic levels.


Corporates to bounce back

The impact of the pandemic was not felt uniformly in the corporate world. Some sectors were essentially immune to the ramifications of the pandemic, while others saw a dramatic decrease in their business. Many industries saw an increase in business activity during the same period. By the end of this year, the least affected sectors like telecom and IT will see their balance sheet metrics to return to similar levels of 2019. Sectors that have felt the most profound impact of the pandemic might not see the pre-pandemic numbers well into 2022, or maybe even longer. Nevertheless, corporations worldwide will find themselves in a much better position in the near future.


Bank creditworthiness will improve

2021 will test the underlying asset quality of banks as support measures will begin to unwind. As debt moratoria, forbearance schemes, and fiscal stimulus measures will start to expire, it will reveal the true picture of the damage done by the Covid-19 pandemic. Also, as corporates will rejuvenate their financial status, banks’ willingness to lend will increase dramatically. Beyond 2021, new forms of competition will emerge, and the continued pressure to invest in digital transformation will further affect the profitability of companies, which in turn will shape banks’ lending preferences.


Risk to global structured finance

The economic environment will improve as we move into the first quarter of 2021, the rating trends for several asset classes will be classified as “stable-to-negative”, with at least “somewhat weaker” collateral trends in the majority of the asset classes. This rating trend has some negative implications, primarily as some industries continue to face hardships due to the pandemic, which will in turn negatively impact some asset classes.


Also, as moratoria and forbearance holidays will continue in the first quarter of 2021, and a massive chunk of these loans will struggle to resume their original repayment schedules, it will also affect some asset classes adversely. Commercial mortgage-backed securities (CMBS), few residential mortgage-backed securities (RMBS), certain asset-backed securities (ABS), and collateralized loan obligations (CLO) will remain the primary focus areas and will be the asset classes to be affected most by the pandemic. For American and European CLOs, corporated loan payment defaults will further affect the asset classes.


Conclusion

There is no doubt that the covid-19 pandemic brought drastic changes to the financial world, particularly to the lending institutions. However, economists and financial analysts globally are predicting 2021 could see a U-shape recovery of the world economy and lending power of banks and other financial institutions. However, the true picture of the pandemic will reveal itself as forbearance and moratoria expire and banks begin to receive payments on their loans.


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