“Moody’s outlook for global banks in 2024 is negative as central banks' tighter monetary policies have resulted in lower GDP growth. 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 capitalization will remain stable, benefiting from organic capital generation and moderate loan growth and as some of the largest US banks build up capital,” said Felipe Carvallo, Vice President - Senior Credit Officer at Moody’s Investors Service.

Key Drivers of Our Negative Outlook:

» The operating environment will deteriorate under tight monetary policies. Major central banks will start to cut rates, but money will remain tight, resulting in lower GDP growth in 2024. Inflation is slowing, but geopolitical and climate risks remain. China's economic growth is set to slow on muted private spending, weak exports and an ongoing property market correction.

» Loan quality will be squeezed by low liquidity and tighter repayment capacity. Past rate hikes will lead to greater asset risk and reserve buildups. Rising unemployment in advanced economies will weaken loan performance. Commercial real estate exposure in the US and Europe is a growing risk; in Asia-Pacific, specific property markets face stress. Chinese banks face risks from slower economic growth and second-order impact from a prolonged property downturn. 

» Profitability will fall on higher funding costs, lower loan growth and loan-loss provisioning needs. Profitability gains from the last two years will likely start to subside, but remain sound. Higher funding costs will shrink net interest margins, while loan production will continue to weaken as rate hikes limit demand and credit standards tighten. Provisioning expenses will follow increases in asset risks, while operating expenses contend with rising tech-related investments and new regulatory costs. 

» Funding and liquidity will be more challenging because of monetary policy tightening. Deposit growth will decelerate as deposits move to more expensive accounts or exit banking systems, while market funding increases. Lower loan growth will limit funding strains. Foreign currency shortages will strain liquidity in some frontier markets. 

» Capital will remain broadly stable. Banks in Europe will maintain ample buffers above regulatory minimums. In the US, some of the largest banks will build capital because of regulatory changes. In Asia-Pacific, organic capital generation and prudent dividends will allow capital stability.

Key trends in Africa, negative

• Operating conditions will remain difficult, but banks are accustomed to navigating turbulence.
• Egypt, Kenya and Tunisia have large refinancing needs, including in foreign currency, and are among the most exposed to debt rollover risk or higher interest rates further weakening debt affordability. Ghana  completed its local currency debt restructuring in 2023, but its foreign-currency debt restructuring remains pending. Sovereign debt exposure links banks’ creditworthiness with that of the sovereign, and is highest in Egypt, Kenya, Ghana, Tunisia and the West African Economic and Monetary Union (WAEMU).
• African banks will likely remain well capitalized and continue to gradually roll out stricter Basel capital regulations, although progress will vary widely.
• Profitability will improve on higher rates, but forbearance will mask weaker underlying earnings.
• Local-currency funding will be stable.
• African banks will remain primarily deposit funded in local currency. However, tight global conditions will increase costs for those raising funding in eurobond debt capital markets.
• Foreign-currency shortages will pose risks to banks’ liquidity.

Please note that the negative outlook reflects our view of credit fundamentals in the global banking sector over the next 12 months. A sector outlook does not represent a sum of upgrades, downgrades or ratings under review or an average of rating outlooks