Solid, though decelerating, global economic growth will continue to support banks’ creditworthiness in 2019, says Moody’s Investors Service in a report published on Thursday (Dec 6). Geopolitical and domestic risks, however, pose the greatest source of uncertainty and risk.
Geopolitical and domestic risks, however, pose the greatest source of uncertainty and risk in 2019, with US – China tensions spreading far beyond trade disputes.
In addition, the risks of a ‘no-deal’ Brexit scenario under which the UK banks’ credit fundamentals would weaken, have increased. Meanwhile, domestic and political risks will continue to weigh on the outlooks for Argentina, Brazil, Italy, and Turkey, with credit-negative implications for their banking systems.
On the other hand, rising interest rates will help improve profitability, providing some boost to banks’ net interest margins, as already seen in the US. Nonetheless, profitability will continue to be a credit weakness for many banking systems, particularly in Europe, with still low interest rates and elevated cost bases keeping returns on assets and capital modest.
Moody’s also expects financial stability risk to rise following a decade-long period of low interest rates. As monetary policy gradually normalizes in advanced economies, particularly the US, volatility will return to financial markets, a challenge for many banks but also an opportunity for firms with large trading activities.