Negative Outlook for Global Banks in 2024

Moody’s Investor Service has recently issued a negative outlook for global banks in 2024. This is primarily due to the impact of tighter central bank monetary policies, lower economic growth, and increased asset risk.

Impact on Profitability and Loan Growth

One of the key concerns highlighted by Moody's is that the higher cost of capital will slow down profitability gains for banks and also impact loan growth. As a result, banks are expected to build up reserves to strengthen their balance sheets in anticipation of an economic slowdown.

Challenges in Funding and Liquidity

Moody's analyst, Felipe Carvallo, further emphasizes that funding and liquidity will become more challenging for banks. This could pose difficulties for banks in maintaining their financial stability.

Stable Capitalization

On a positive note, Moody's predicts that capitalization will remain stable as banks benefit from organic capital generation and moderate loan growth. Additionally, some of the largest U.S. banks are expected to strengthen their capital positions.

Deteriorating Operating Environment

Despite the potential for major central banks to cut interest rates, Moody's anticipates an overall deterioration in the operating environment. This will likely result in lower gross domestic product figures in 2024. While inflation is slowing down, there are still concerns related to geopolitical and climate risks.

Factors that Could Improve the Outlook

Moody's highlights that a sharper-than-expected drop in inflation, monetary easing, or an economic pickup could prompt them to raise their outlook to stable. If there is stronger-than-expected growth in GDP and inflation falls within the central bank targets, it could also lead to a positive outlook for the banking sector.

Headwinds Faced by Banks

Moody's identifies several headwinds that may impact banks:

• Loan quality will be squeezed due to low liquidity and tighter repayment capacity. The performance of loans could weaken as unemployment increases in advanced economies. Additionally, exposure to commercial real estate in the U.S. and Europe poses a growing risk.
• Profitability is expected to decline due to higher funding costs, lower loan growth, and the need for loan-loss provisioning.
• Funding and liquidity will be more challenging, particularly as deposit growth decelerates.

In summary, Moody's pessimistic outlook reflects the challenges that global banks may face in the coming years. It is crucial for banks to navigate these headwinds carefully and adapt their strategies to maintain stability and mitigate risks.