Moody's Investors Service has issued a negative outlook for global banks in 2024, attributing the negativity to the repercussions of central banks' tightening of monetary policies. Felipe Carvallo, the vice-president - senior credit officer at Moody's, highlighted that these policies have led to lower gross domestic product (GDP) growth, triggering a chain reaction affecting loan quality, asset risks, and overall profitability.
Carvallo explained, "Reduced liquidity and repayment capacity will squeeze loan quality, leading to greater asset risks. Profitability will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will pose challenges, but capitalisation will remain stable, benefiting from organic capital generation and moderate loan growth and as some of the largest US banks build up capital."
Here are the key findings of Moody's report:
Deteriorating operating environment
Under tight monetary policies, major central banks are anticipated to cut rates, but global money conditions will remain stringent. This is expected to result in a slowdown in GDP growth for 2024, compounded by lingering geopolitical and climate risks. China's economic growth is poised to decelerate due to subdued private spending, weak exports, and an ongoing correction in the property market.
Squeezed loan quality and rising asset risks
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Low liquidity and tighter repayment capacity will squeeze loan quality, leading to increased asset risks and reserve buildups. Unemployment spikes in advanced economies, coupled with growing risks in commercial real estate in the US and Europe, add to the challenges. Specific property markets in the Asia-Pacific region also face stress, with Chinese banks particularly vulnerable to the impact of a prolonged property downturn.
Decline in profitability
Higher funding costs, diminishing loan growth, and increased provisioning needs are expected to cause a decline in profitability. While gains from the past two years are likely to subside, higher funding costs will shrink net interest margins. Operating expenses will contend with rising tech-related investments and new regulatory costs.
Funding and liquidity challenges
Monetary policy tightening will likely make funding and liquidity more challenging. Deposit growth will decelerate as deposits shift to costlier accounts or exit banking systems. Lower loan growth will limit funding strains, and foreign currency shortages may strain liquidity in certain frontier markets.
Stable capital amid challenges, a silver lining
Despite challenges, capitalisation is expected to remain broadly stable. European banks will maintain ample buffers, some of the largest US banks will build up capital due to regulatory changes, and Asia-Pacific banks will benefit from organic capital generation and prudent dividends.
Asia-Pacific expected to remain stable
Most Asia-Pacific economies are anticipated to maintain growth stability. This includes loan quality, profitability and capital, with a few exceptions.
China's economic slowdown poses risks to the region, with potential major ramifications, according to Moody's report. Loan quality in Asia-Pacific is expected to remain broadly stable, except for markets with high household leverage and/or a real estate market downturn. Property markets in mainland China, Korea, and Vietnam have deteriorated, with problem loan ratios likely to remain stable or increase moderately.
While profitability in the region is projected to stabilise in pandemic recovery, Chinese and Indian banks may be an exception in the region. Indian banks may experience increased profitability, while Chinese banks face a contraction in net interest margins.
Capital in the Asia-Pacific region is expected to remain broadly unchanged, with authorities adopting and adapting Basel III rules to strengthen bank capital. Basel III accord is a set of financial reforms that aim to strengthen regulation, supervision, and risk management of the global banking sector.
Banks in Asia-Pacific are expected to remain well-funded by deposits and not heavily rely on wholesale sources, ensuring stability in funding and liquidity.