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Moody’s 2024 Outlook for Global Banking: Challenges and Resilience

The global banking sector faces a challenging year in 2024, according to Moody’s latest outlook. The agency predicts a negative scenario, largely due to the rising interest rates imposed by central banks, which are expected to slow down GDP growth. These higher rates are likely to reduce liquidity and limit loan repayment capacity, impacting the quality of loans.

Despite these challenges, there are silver linings. Banks’ capitalization is anticipated to remain stable, benefiting from organic capital generation and moderate loan growth. Notably, major U.S. banks are expected to strengthen their capital levels.

The liquidity aspect remains a concern, especially with central banks poised to reduce rates. Moody’s anticipates the Federal Reserve to initiate rate cuts by mid-2024, aiming to lower them to between 4.25% and 4.5% by the end of the year and further down to 2.75%-3% in 2025. The European Central Bank is also expected to start reducing rates in the first half of 2024, with the refinancing rate potentially dropping to 3.25% by year-end and 2.25% by the end of 2025. The Bank of Japan is also on a path to normalize its ultra-accommodative monetary policy in response to high inflation and wage increases.

An additional concern is the expected deterioration in the quality of banking assets, particularly in the United States and Europe. The erosion of economic fundamentals could make it harder for borrowers, including families and businesses, to honor their debts. This scenario, exacerbated by the recent interest rate hikes by central banks, might lead to an increase in Non-Performing Loans (NPLs), compelling banks to set aside more reserves for deteriorated credits and bad loans.

Bank profitability is also projected to decline due to higher funding costs, slower loan growth, and the need to allocate more reserves and adjustments for credit. Profit growth, which has been robust in the last two years, is likely to slow down. European and North American banks, in particular, will face pressure as they seek financing in the market at higher interest rates. This situation has prompted some Italian banks to issue new bonds, leveraging Moody’s decision not to downgrade Italy’s sovereign debt rating.

The trend of bank deposits is also expected to continue diminishing. Banks with more diversified operations and broader franchise networks are likely to fare better than those with more concentrated business models. Moody’s cites UniCredit as an example of a bank that fits into this more resilient category.

In terms of loan performance, Moody’s anticipates a deterioration in specific categories, such as commercial real estate, where borrowers struggle due to a combination of higher refinancing costs and lower collateral values.

However, European banks are expected to see a stabilization in profits in 2024. This follows a strong growth period supported by rapid and substantial interest rate hikes by the European Central Bank, which have boosted banks’ net interest margins, especially those predominantly issuing variable-rate loans. The repayment of loans received from central banks and increased competition among lending institutions, leading to higher deposit remunerations to attract customers, will also influence profitability.

Despite these challenges, Moody’s notes the resilience of the banking sector to adverse shocks, as confirmed by stress test results from the European Banking Authority and the Bank of England. The agency expects capital buffers to remain ample, with capital levels largely unchanged in 2024, supported by solid internal capital generation and generally flat Risk-Weighted Assets (RWA) levels. Banks might continue to distribute excess capital to shareholders in the form of dividends and share buybacks.


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Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.

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