Moody’s Investor Service on Monday issued a negative outlook for global banks in 2024 as financial firms face tighter central bank monetary policies, lower economic growth and greater asset risk.
Higher cost of capital will cause profitability gains to slow down while impacting loan growth. Banks are expected to build up reserves to shore up their balance sheets in an economic slowdown, Moody’s said.
“Funding and liquidity will be more difficult,” said Moody’s analyst Felipe Carvallo.
On the positive side, capitalization will remain stable as banks benefit from organic capital generation and moderate loan growth and as some of the largest U.S. banks build up capital.
Overall, the operating environment is expected to deteriorate even as major central banks potentially start to cut interest rates.
Tighter money supplies will also result in lower gross domestic product figures in 2024.
“Inflation is slowing, but geopolitical and climate risks remain,” Carvallo said.
A sharper-than-expected drop in inflation, monetary easing and an economic pickup could be factors that could prompt Moody’s to raise its outlook to stable.
Stronger-than-expected growth in GDP and inflation falling to central bank targets could spark a positive outlook for the sector, Moody’s said.
The headwinds cited by Moody’s include:
- Loan quality will be squeezed by low liquidity and tighter repayment capacity. Increased unemployment in advanced economies will weaken loan performance, while commercial real estate exposure in the U.S. and Europe poses a growing risk
- Profitability will fall on higher funding costs, lower loan growth and loan-loss provisioning needs.
- Funding and liquidity will be more challenging, as deposit growth decelerates.
