Moody's sees stable outlook for banks

THE broad-based upturn in economic growth and improved solvency will underpin bank creditworthiness in the coming year but profitability will stay subdued, Moody's Investors Service said in a report on Thursday.

The credit ratings agency expects global growth in gross domestic product of 3.2 per cent for the G20 economies in 2018, as the positive economic momentum that began in 2017 continues next year.

"The global banking sector will benefit from favorable credit conditions that include improving economic growth and a supportive funding environment," said Robard Williams, a senior vice president at Moody's. "However, broadly stronger economic growth is not expected to translate into material improvements in bank profitability in the coming year."

Bank profitability remains subdued across regions as the low rate environment continues to weigh on returns, and nonperforming loan levels remain stubbornly high in some jurisdictions, said Moody's.

At the same time, efforts to reduce costs will be constrained by a number of issues, including technology investments, ongoing restructuring, and regulatory compliance, it said.

"The imperative for banks to boost customer acquisition and retention and improve efficiency through new and improved uses of technology will continue" said Mr Williams. "While we do not expect incumbents to lose their position at the centre of banking services any time soon, 2018 will bring ongoing challenges to their competitive position."

Some large technology companies that are beginning to leverage their own customer bases and technological capabilities to offer financial services - Alibaba, for example - have already had meaningful success in offering payment, lending and asset management products to their customers, the report nooted.

Moody's also said banks face downside risks from relatively high corporate and household indebtedness as monetary policy in developed markets gradually tightens over the next few years, making borrowers' creditworthiness more vulnerable to a slowdown in growth or an interest rate shock.

There were also risks in some markets from elevated asset prices such as housing and equities, the agency added.

"While we expect broad-based economic growth to support borrowers' repayment capacity, pockets of high borrower leverage have been manifest in some credit deterioration - for example, in US banks' credit card and auto loan portfolios," it said.

"An additional vulnerability would be a significant correction in currently-elevated asset prices, which would weigh on consumer sentiment and spending, worsen financial conditions for affected firms and push up losses on corporate and consumer loans," said Mr Williams.