The global economic recovery and the prospect of rising interest rates underpin the credit outlook for the financial sector in 2022, says Fitch Ratings.

In a new report, the rating agency said the outlook for most financial institutions — including banks, insurers and others such as brokerage firms — is neutral based on expectations that the operating environment will continue to improve amid an ongoing (although slowing) economic recovery.

To start the year, 80% of the sector’s credit outlooks are neutral, Fitch noted; 12% are positive, and just 8% are deteriorating.

“Economic growth is expected to slow slightly in 2022 but still support credit expansion,” it said.

As both fiscal and monetary policy supports for the recovery recede, Fitch expects some decline in loan asset quality for both banks and non-banks.

“However, we believe banks will offset these reductions with improved pre-impairment profitability and the reduction of loan loss allowances and excess capital buffers accumulated through the pandemic,” it said.

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Additionally, strong capital levels and funding conditions “should help mitigate a moderate pick-up in credit costs,” Fitch said.

Gradually rising interest rates are also seen as an overall positive for financial firms’ operating results.

However, for the insurance sector, Fitch said that “the negative impact of historic low rates on profitability will remain for some time.”

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“Low rates have resulted in an increased allocation to higher-risk alternative investments by life insurers, as well as a structural shift toward more capital-light models,” it said. “The economic recovery should result in volume growth in non-life business lines, with pricing discipline expected to continue.”