The outlook for the global banking sector has dipped to negative from stable amidst weak economic growth, low rates and challenging operating conditions, declared Moody’s Investors Service in a release published Dec. 5.
“Risks are on the downside for banks,” said Simon Ainsworth, associate managing director at Moody’s. “Rising recession risk in the U.S. and Europe, together with slowing growth in [Asia-Pacific] and emerging markets, will lead to deteriorating loan quality and higher loan-loss provisioning costs.”
At the same time, the release said, a return to monetary easing, including the use of negative interest rates in some markets, is adding to the banking sector’s profitability pressures.
“Banks with higher cost structures will be hardest hit, reopening questions about the long-term viability of certain business models. Profitability will continue to be a credit weakness for many banking systems, particularly in Europe,” the release said.
Additionally, Moody’s said that ongoing trade tensions between the U.S. and China have negative consequences for banks in those two countries and in other export-oriented economies.
“Trade tensions are likely to result in deteriorating loan quality of banks in Asia and U.S., and there is a risk that further escalation would trigger a financial market sell-off,” the release said.
Similarly, a no-deal Brexit could weaken the U.K. banking sector.
Within the sector, disruptive technologies will continue to drive innovation, Moody’s noted.
“Incumbent banks are having to invest heavily in digital innovation to defend their businesses from a wave of new digital entrants,” said Antonello Aquino, associate managing director at Moody’s, in the release.
“To date, small technology-driven finance firms have not been a real threat to the core businesses of large incumbent banks. However, disruption to payment services is advanced and we expect further encroachment by Big Tech into financial services,” he added.