Moody’s Ratings has changed its global outlook on banking system to stable from negative, reflecting its expectation that stabilisation of economic growth and monetary easing will support the operating environment for banks, alleviate pressure on their asset quality and help their deposit growth recover.
However, geopolitical conflicts, trade tensions and post-election policy changes in the US will create significant uncertainty and risks.
The rating agency expects most G-20 economies to move from cyclical recovery to slower but sustainable rates of growth in 2025 amid monetary easing.
Deposit growth will continue to recover in 2025, though moderately, because rate cuts will erode returns on investment products and make deposits more attractive, it added.
The agency opined that lower rates, coupled with economic growth, will help improve borrowers’ debt repayment capacity in major systems, supporting loan quality and keeping nonperforming loan (NPL) ratios relatively low.
Yet exposures to commercial real estate (CRE) will continue to weigh on banks’ asset quality in the US, Europe and some Asia-Pacific systems.
Asset quality
“Banks’ asset quality will be stable in most systems in Asia-Pacific as declines in interest rates will help improve borrowers’ debt repayment capacity. In some systems such as India and the Philippines, NPL ratios will normalize from cyclically low levels,” per Moody’s global outlook for banks for 2025.
Moody’s expects banks to keep their capital ratios stable because large banks can phase in the new Basel III standards over long periods and already have sufficient headroom above minimum capital requirements.
However, a weakening of fiscal capacity will somewhat constrain governments’ abilities to provide support for banks in some systems.
The agency assessed that banks’ profitability will weaken in most systems as net interest margins (NIMs) decline after rate cuts. Pressure on NIMs will be greater in systems where competition is intense, banks are heavily reliant on deposits for funding or large proportions of loans carry floating rates.
Asia-Pacific systems
Also, regulators in some Asia-Pacific systems, such as India and Australia, will continue to enhance banks’ abilities to manage liquidity risks by tightening regulations
In 2024, the Reserve Bank of India proposed a tightening of rules for calculating banks’ liquidity coverage ratios, while the Australian Prudential Regulatory Authority finalised rules to strengthen the resilience of smaller banks to liquidity risks. Moody’s expects banks in most systems to maintain robust net stable funding ratios and liquidity coverage ratios in 2025.
Moody’s emphasised that strong growth in major economies, an easing of geopolitical conflicts and trade tensions and recovery in CRE markets in key systems could result in an outlook change to positive. An escalation of geopolitical conflicts, a resumption of higher inflation and consequent monetary policy tightening are factors that could lead to a negative outlook.
