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Global banking outlook stable, sound capital and liquidity

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The outlook for the banking industry is stable for the next 12 to 18 months as the global economy maintains a steady recovery, helping support banks’ asset quality and keeping loan loss levels low, Moody’s Investors Service said in a new report.

The rating agency explained that during the pandemic, consumers and businesses were supported by emergency measures that kept unemployment low and ensured that banks’ asset quality was protected.

It said that economic growth should be “sufficiently strong” next year for this dynamic to continue, even as support measures are wound down and monetary policy tightens.

“Corporate and consumer default rates will likely remain low and funding conditions will remain accommodative, as we expect central banks will only tighten policy gradually,” said Michael Rohr, a Senior Vice President at Moody’s and author of the report.

“Solid capital positions, improved loan loss reserves and sufficient liquidity will protect banks’ credit profiles.”

Higher inflation will not immediately undermine banks’ profitability. In the short-run, it could even benefit banks’ asset quality, particularly if borrowers’ nominal income strengthens, reducing the real cost of servicing loans.

Moody’s further expects inflationary pressures to subside in 2022.

However, persistently higher inflation accompanied by a sudden rise in interest rates would weigh on asset valuations and push up customer borrowing costs, raising the likelihood of loan delinquencies and elevated provisions, the Moody’s report concluded.