Outlook for banks turns negative amid slowing economies, trade tensions, says Moody’s

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The outlook for global banks has changed to negative from stable as slower economic growth, low interest rates and more volatile operating conditions will increase their credit challenges, Moody’s Investors Service said in a report published Thursday.

“Risks are on the downside for banks,” said Simon Ainsworth, AMD-Banking and Insurance at Moody’s. “Rising recession risk in the US and Europe, together with slowing growth in APAC and emerging markets, will lead to deteriorating loan quality and higher loan-loss provisioning costs.”

A return to monetary easing and the use of negative interest rates in some regions adds to profitability pressures. Banks face particular challenges in passing on negative rates to retail depositors. 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.

Trade tensions between the US and China appear entrenched, with negative consequences for banks in those countries as well as in other export-oriented economies and for banks funding trade. Trade tensions are likely to result in deteriorating loan quality of banks in Asia and US, and there is a risk that further escalation would trigger a financial market sell-off. A failure to agree a trade deal between the UK and EU following Brexit would weaken the UK banking sector.

Disruptive technologies will continue to drive innovation across certain business segments, particularly in payment services. “Incumbent banks are having to invest heavily in digital innovation to defend their businesses from a wave of new digital entrants,” said Antonello Aquino AMD-Banking and Insurance at Moody’s.

“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.”