Moody’s Investors Services has painted a cautious outlook for global banks in 2024, citing a confluence of factors that could pose substantial challenges. The credit rating agency points to sluggish global growth, an elevated risk of borrower defaults, and increasing pressure on profitability as key concerns.
The backdrop for these concerns includes prior central bank rate hikes and a rise in unemployment in advanced economies, factors expected to erode asset quality. Real estate exposures in the United States and Europe are specifically highlighted as potential risks, with ongoing stress in Asia-Pacific property markets.
Despite a mixed performance reported by global banks in 2023—benefiting from consumer revenues due to central bank rate hikes but facing challenges in investment banking amid a dealmaking slump—Moody’s anticipates a continuation of tight monetary conditions. This is expected to lead to lower economic growth, even as central banks shift toward rate cuts.
China’s economic trajectory is forecasted to be impacted significantly, with a slowdown expected due to factors such as subdued consumer and business spending, weak exports, and an enduring property market crunch.
Moody’s emphasizes that bank profitability may face pressures from high funding costs, reduced loan growth, and the need to accumulate reserves for potential defaults. However, there is a silver lining as the report suggests that capital levels, crucial for ensuring the financial soundness of banks, are expected to remain relatively resilient.
The real estate market comes into focus as major landlords globally, including China, Sweden, and Germany, grapple with challenges. Last week’s insolvency declaration by European property and retail giant Signa serves as a notable example, marking the most significant casualty of the continent’s property slump to date.
Commenting on Signa’s insolvency, Paul Watters, head of corporate research for Europe at S&P Global, points out potential stability risks to the market if the restructuring process results in distressed sales. Watters underscores the market’s vulnerability and the need for careful observation as events unfold.
As 2024 approaches, global banks find themselves at a critical juncture, requiring strategic decision-making and robust risk management to navigate the complex economic landscape that lies ahead.
By: Montel Kamau
Serrari Financial Analyst
4th December, 2023
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