Even before the Covid-19 outbreak hit the economy, North American banks were facing a tougher earnings environment — and the pandemic is turning up the pressure, Fitch Ratings says.
In a new report, the rating agency said that persistently low interest rates and growing technology demands were already challenging banks, and these trends are only being intensified by the pandemic.
As a result, in the medium-term, Fitch expects that banks in Canada and the U.S. “will continue to face a challenging operating environment.”
Banks were already confronting the effects of low interest rates before central banks’ responses to Covid-19 pushed rates even lower.
Fitch said that this will amplify the profitability challenges banks are facing, and will likely lead to further consolidation (particularly among the U.S. regional banks) and reviews of current business models.
At the same time, banks continue to face growing competition from other firms edging into the provision of financial services, coupled with evolving customer habits, which has increased the pressure on banks to compete on the technology front.
“While digital investments were a key focal point of North American banks prior to the pandemic, Fitch believes increased digital adoption and usage rates will necessitate the need for further investments to be made now for banks to remain relevant and viable over the longer-term,” the rating agency said.
Tech deployment will increasingly separate winners from losers in the banking sector, Fitch suggested.
The pandemic has also intensified the relevance of ESG risks to banks. While governance has always been important to the banking sector, Fitch said that social and environmental factors are expected to continue gaining significance.
“Fitch believes that as the impact of the pandemic become more pronounced, social and economic inequality issues might pose reputational risks over the long term,” the report said.