Payment moratoria will weaken European non-bank lenders' operating cash flows in the short term but the ultimate impact on liquidity will depend on the speed and scope of payment holiday applications, Fitch Ratings says.
Several European countries have adopted personal loan and credit card payment holidays to protect consumers from the economic fallout caused by the coronavirus pandemic.
Fitch predicts that this is set to hit non-bank lenders more than banks because their clients are more likely to have poor credit histories or irregular income streams and are therefore more prone to economic shocks and so eligible for payment holidays.
Unlike banks, alternative lenders typically do not have access to retail deposits or central bank facilities. They depend on wholesale funding resources, which are sensitive to investor confidence and mostly closed to non-bank lenders amid the pandemic. In addition, the sector has been largely excluded from governments' emergency funding schemes.
Fitch recently revised the consumer finance sector outlook to negative and has taken numerous negative rating actions on European issuers in the sector. Extended payment holidays will also weaken liquidity, which could start to undermine non-bank lenders' franchise strength if they cannot mitigate the effect through alternative funding sources, says the firm.
Meanwhile, with interest accruing at high rates during loan freezes, borrowers are set to owe larger amounts in a few months, leading to higher impairments, putting pressure on cash flows.
While Fitch majors on non-bank lenders, traditional banks are not immune to the threats posed. A report by the Boston Consulting Group argues that banks will need to put in place individual company stress tests to anticipate looming credit problems, but warns that legacy IT platforms may prevent a clear picture from emerging.
"Although all industries will be impacted by Covid-19, the effects will vary by sector and client," states BCG. "Risk drivers specifically related to the Covid-19 outbreak are not currently captured by credit-ratings systems. Banks, therefore, need to ensure that they understand their positions and can mitigate issues quickly."