Moody's Outlook For Global Banks 2024
Moody's Outlook For Global Banks 2024
Moody's Outlook For Global Banks 2024
Outlook definition
The negative outlook reflects our view of credit fundamentals in the global banking sector over the next 12 months. Sector outlooks are
distinct from rating outlooks, which, in addition to sector dynamics, also reflect issuers’ specific characteristics and actions.
A sector outlook does not represent a sum of upgrades, downgrades or ratings under review or an average of rating outlooks.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the
most updated credit rating action information and rating history.
2 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Tightening underwriting standards, which we are seeing among US banks and European banks, in response to rising asset risks can
lead to credit contraction, which in turn reduces growth. The slowdown follows the aggressive removal of monetary stimulus and
withdrawal of COVID-19 pandemic aid packages and Russia’s war on Ukraine (Ca stable). The military conflict between Israel (A1 review
down) and Hamas could yet negatively influence credit conditions through oil prices and market sentiment.
Exhibit 2
GDP growth in 2024 will decelerate, especially among advanced economies
Economic growth
G-20 Aggregate 8% 3.5%
G-20 Advanced Economies (AE) 4.3% 3.7% 3.8%
G-20 Emerging Markets (EM)
4%
Share of global GDP
Rest
22% 0%
2.3% 1.7% 1.0% 1.8%
However, there will be key differences in operating conditions for advanced economies and emerging economies, but also within
those markets as well. GDP growth will fall among advanced G-20 economies, especially in the US, as unemployment rises and lower
consumer spending, dampened by interest rates, pulls down economic activity. On the upside, large-scale infrastructure investment
and industrial policies enacted in the last two years — combined with innovations in artificial intelligence and big data — could boost
long-run productivity and growth.
We expect a relative acceleration in the euro area, UK (Aa3 stable) and Korea (Aa2 stable). However, downside risks for the euro area
remain related to shocks from a resurgence in energy prices this winter, when demand for energy tends to rise.
Among G-20 emerging markets, GDP growth will remain fairly stable compared with 2022 and 2023. China faces a slowdown in
GDP growth to 4% in 2024, from 5% in 2023, on muted private spending, weak exports and an ongoing property market correction,
compared with fairly robust economic growth among the rest of the G-20 emerging markets. Excluding China, G-20 emerging markets
will grow 3.3% in 2024, down slightly from an estimated 3.5% in 2023.
Pockets of resilient GDP growth, mainly in emerging markets, will better sustain bank operations
Operating conditions for banks in various emerging markets will benefit from an earlier easing or steady monetary policies and higher
or resilient GDP growth. Countries that do not rely heavily on international trade and have strong domestically focused economies will
maintain high GDP growth, including India (Baa3 stable), which will expand at 6.1% in 2024 and Indonesia (Baa2 stable), which will
expand at 5%. In Brazil (Ba2 stable), a strong performance led by agriculture and mining has waned but has upside potential for 2024.
Meanwhile, South Africa's (Ba2 stable) economy remains vulnerable to rolling power cuts, resulting in a slowdown in economic growth
in 2023, before beginning a tepid recovery in 2024 and 2025, assuming an improved energy situation.
Banking systems in the Gulf will benefit from high oil prices and robust non-hydrocarbon GDP expansion that will support economic
activity, including diversification agendas. Countries in the Commonwealth of Independent States (CIS), such as Kazakhstan (Baa2
positive), Azerbaijan (Ba1 stable), Armenia (Ba3 stable) and Uzbekistan (Ba3 stable), will also gain from oil prices, higher trade volumes
and their new trade roles, now that Russia has fewer commercial ties with Western countries.
3 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Geopolitical tensions between China and the US/EU (Aaa stable) are reshaping industrial policies and fomenting supply-chain
diversification, resulting in faster GDP growth in Mexico (Baa2 stable) from nearshoring. Geopolitical tensions will also benefit countries
in the Association of Southeast Asian Nations (ASEAN)1 and in Central America, as well as India.
4% 6%
4%
2%
2%
0%
0%
-2%
-2% -4%
2016 2017 2018 2019 2020 2021 2022 2023F 2024F 2025F 2016 2017 2018 2019 2020 2021 2022 2023F 2024F 2025F
Given the risks, interest rates will remain relatively high in most advanced economies, limiting significant easing in emerging markets.
In the euro area, rates are higher than before the global financial crisis of 2008 and in the US they are as high as they were at end-2008
(Exhibit 5). We envision the Federal Reserve's first rate cut around the end of Q2 and a cumulative decline of at least 100 bp to
4.25%-4.50% by December 2024, followed by an additional 125 bp to a terminal rate of 2.75%-3% in 2025, if economic conditions
broadly develop in line with our forecasts. The European Central Bank (ECB) is also likely to begin rate cuts before the end of the
first half in 2024. We expect the ECB to lower the refinancing rate to 3.25% by the end of 2024 and to 2.25% by year-end 2025.
Meanwhile, the Japanese central bank is looking to normalize its ultraloose monetary policy amid elevated inflation and wage hikes.
4 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 5
Interest rates in advanced economies will remain relatively high
US Fed Fund Rate UK Central Bank Rate Euro Zone Central Bank Rate Japan
7%
6%
5%
4%
3%
2%
1%
0%
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-17
Feb-18
Feb-19
Feb-21
Feb-22
Feb-23
Jun-07
Jun-08
Jun-09
Jun-11
Jun-12
Jun-13
Jun-15
Feb-16
Jun-16
Jun-17
Jun-19
Feb-20
Jun-20
Jun-21
Jun-22
Jun-23
Jun-10
Jun-14
Jun-18
Oct-07
Oct-09
Oct-10
Oct-11
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-22
Oct-23
Oct-08
Oct-12
Oct-21
Source: FactSet, Moody's Investors Service
The People's Bank of China (PBOC) is likely to maintain an easy monetary policy stance. PBOC has lowered lending rates and the
reserve requirement ratio to facilitate bank lending and we could see additional cuts to shore up an economic recovery in the coming
months. Central banks in Latin America and Eastern Europe, including Brazil and Hungary (Baa2 stable), have begun to cut rates
amid easing inflation. Other major EM central banks reached stability in 2023, including India and South Africa (Exhibit 6). However,
Indonesia and the Philippines (Baa2 stable) resumed rate hikes in October, the latter in an unexpected off-cycle hike to anchor long-
term inflation. Emerging Asia-Pacific may continue to raise rates to counter large swings in capital flows and currency volatility while
guarding against still-significant local inflation.
Exhibit 6
EM central banks have reached stability or already begun to ease interest rates
Local policy rates
China Brazil India South Africa Hungary Indonesia
16%
14%
12%
10%
8%
6%
4%
2%
0%
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
Feb-21
Feb-23
Feb-08
Feb-15
Feb-22
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Oct-22
Oct-23
Jun-07
Jun-08
Jun-09
Jun-10
Jun-12
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-21
Jun-22
Jun-23
Jun-11
Jun-13
Jun-20
5 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 7
Unemployment will rise across advanced economies, but remain below 22-year averages
Latest period in 2023 Average (2000 - 2022) Minimum (2000 - 2022) Moody's 2024 forecast
12% 35%
10% 30%
25%
8%
20%
6%
15%
4%
10%
2% 5%
0% 0%
Household confidence has held up despite higher costs of living, elevated interest rates and slower economic growth. However, as
unemployment ticks up, consumer confidence will weaken in 2024. Businesses remain cautious (compare Exhibits 8 and 9) with
economic uncertainties ahead.
Exhibit 8 Exhibit 9
Consumer confidence stands to weaken as unemployment rises … … and businesses remain cautious
Consumer Confidence Index Business Confidence Index
US UK EU Japan US UK EU
Japan China Brazil
China Brazil OECD - Total South Africa
106% OECD - Total India South Africa
106%
104%
104%
102%
102%
100%
100%
98%
98%
96%
96%
94%
92%
94%
90% 92%
90%
Source: OECD
6 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 10
Household indebtedness is high among advanced economies, but low among most emerging markets
Total debt of households to disposable income
Q4 2018 Q2 2023
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Australia Canada Euro area France Germany Italy Japan Korea United US Brazil China India Indonesia Mexico South Turkiye
Kingdom Africa
Advanced economies Emerging markets
Last data available: Japan - March 2022, Korea - December 2022, UK - March 2023, China - December 2022, India - March 2023, Indonesia Mexico and Turkiye - December 2021. For China,
India and Indonesia, we use Moody's estimates with data from the Bank of International Settlements (BIS), People's Bank of China, National Bureau of Statistics of China, Reserve Bank of
India and Statistics Indonesia
Sources: Haver Analytics, OECD, Moody's Investors Service
Loan quality will be squeezed by low liquidity and tighter repayment capacity
Loan performance will likely deteriorate amid higher debt-servicing costs and refinancing risks for borrowers, as tighter financial
conditions slow business and consumer activity and reduce their liquidity and incomes. Asset quality will weaken from the rundown
in excess savings and the delayed effect of inflation on household disposable income. Higher unemployment and lower consumer
confidence will also lead to greater numbers of problem loans. In the US, higher problem loans will stem from commercial and
industrial (C&I) loans, commercial real estate (CRE) and consumer credit. Pockets of real estate risks globally also stand to weaken
loan quality. In Latin America, asset risks have already taken shape and problem loans will start to fall gradually in 2024 after tighter
origination policies began at the end of 2022.
Nevertheless, increases in problem loans will be moderate and supported by tighter underwriting standards while a slowdown in
loan growth will limit asset risks. However, problem loans will rise more sharply in banking systems where we expect a combination
of higher unemployment, such as in the UK and Canada; lower consumer confidence, such as in China and South Africa; and where
household indebtedness is higher or has increased in the last few years, such as in some advanced economies and China. Nevertheless,
we expect limited increases in problem loans in China because of banks' proactive risk management.
7 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 11 Exhibit 12
Asset risks will rise moderately, but from low levels and following Loan-loss reserves are ample, but banks will build up more as risks
much improvement rise
Weighted-average problem loans / gross loans per region Weighted-average loan-loss reserves / problem loans per region
2019 2020 2021 2022 1H2023 2019 2020 2021 2022 1H2023
12% 300%
10% 250%
8% 200%
6% 150%
4% 100%
2% 50%
0% 0%
Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference. Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference.
Source: Moody's Investors Service Source: Moody's Investors Service
Our forecast for corporate defaults implies only a limited increase in problem loans in banks' corporate loan books. We expect
corporate defaults will peak in Q1 and then taper to historical averages by end-2024. However, although our baseline scenario does
not anticipate a sharp increase in corporate default rates in the next 12 months, economic and financial risks may send the default rate
higher than our forecasts. In that case, a moderately pessimistic scenario is more likely (Exhibit 13).
Exhibit 13
Defaults will peak in 2024's first quarter
Trailing 12-month speculative-grade default rates
Global Actual Global Baseline Forecast Global Severely Pessimistic Forecast
Global Moderately Pessimistic Forecast Global Optimistic Forecast
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Dec-04
Dec-05
Dec-06
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Aug-05
Aug-06
Aug-07
Dec-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Dec-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-20
Aug-21
Aug-22
Aug-23
Aug-24
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Apr-22
Apr-23
Apr-24
Loan-loss reserves, built up since the outbreak of the COVID pandemic, will help absorb new problem loans (see Exhibit 12). Reserve
coverage among large US banks is ample on average, near one-day CECL2, but US regional banks’ reserves tend to be less conservative.
Although reserve coverage is lowest among Western European banks, the European Banking Authority’s July stress test once again
demonstrated EU banks’ resilience. The exercise, which tested 70 of the largest EU banks’ ability to withstand adverse economic
conditions over 2023-2025, showed solid performance at about two-thirds of those institutions. For those that would breach Common
Equity Tier 1 (CET1) requirements, shortfalls would be very limited, with credit risk as the main loss-driver.
8 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
US and European commercial real estate exposure is a growing risk, with pockets of property market stress in Asia-Pacific
CRE loan exposures are showing strains from higher interest rates and pandemic-driven structural shifts in demand, as well as tighter
lending standards that are leading to lower valuations (Exhibits 14 and 15). Higher loan-to-value ratios — because of lower valuations
and lower debt service coverage because of higher interest rates — increase CRE sponsors’ refinancing risk. In previous downturns, high
CRE concentrations, which are most common among US small and mid-size regional banks, have led to credit strains and even failures.
Smaller US banks are both more CRE-concentrated as a percentage of Tangible Common Equity as well as doing significantly more
late-cycle CRE lending than the largest banks.
Exhibit 14 Exhibit 15
US CRE valuations and transaction volumes have fallen from 2022 European CRE values are down more than 15% from their recent
peaks peaks
US commercial property price indexes and transaction volumes CBRE property value indexes for Europe
Retail Industrial Office - CBD
Retail Industrial Office Combined
Office - Suburban Apartment
300 1200
250 1000
-12%
200 800 -14%
-3% -16%
150 600 -17%
-7%
-7% -20%
100 400
-8%
200
50
0
0
Feb-15
Mar-17
Feb-20
Mar-22
Jun-13
Jan-18
May-16
Jun-18
Apr-19
May-21
Jan-23
Jun-23
Apr-14
Oct-16
Oct-21
Nov-13
Jul-15
Sep-14
Dec-15
Aug-17
Nov-18
Jul-20
Sep-19
Dec-20
Aug-22
Feb-15
Mar-17
Feb-20
May-16
May-21
Mar-22
Jun-13
Jan-18
Jun-18
Jan-23
Jun-23
Apr-14
Oct-16
Apr-19
Nov-13
Sep-14
Jul-15
Dec-15
Aug-17
Nov-18
Sep-19
Jul-20
Dec-20
Oct-21
Aug-22
Source: Real Capital Analytics Source: CBRE Research (ERIX), Moody's Investors Service
In Europe, falling property values will result in more problem loans, but banks are well capitalized and the credit quality of their CRE
loan books is strong. Banks in Sweden (Aaa stable) are the most exposed because of very high CRE concentrations and a deeper
downturn in the local property market.
While many Asia-Pacific property markets have been resilient, those in mainland China, Korea and Vietnam (Ba2 stable) have
deteriorated and remain vulnerable. Real estate companies' repayment ability has weakened and spillovers in the value chain have
further increased asset risks for banks. Also, rules designed to provide debt relief are putting pressure on loan yields and reducing
transparency on loan quality. Of the three, Vietnamese banks are most vulnerable to further real estate market deterioration because
of their larger direct exposure and lower buffers when compared to their Chinese and Korean counterparts.
Banks in Hong Kong SAR, China (Aa3 stable), especially smaller ones, are also showing effects of exposures to property developers
in mainland China, through the developers' offshore exposures. In Australia (Aaa stable) and Korea, high household debt and rising
interest rates exacerbate the risk.
Private credit will pose competition for banks, lowering credit protections and raising systemic risks
Growing and less-regulated private credit markets may take away lending opportunities from the banking system, but they also tend to
finance weaker and more highly leveraged borrowers who are susceptible to higher interest rates. As banks provide funding to private
lenders, any deterioration of credit quality in the private credit system may be reflected in increased loan-loss provisions and spill over
into regulated banks as well.
Nonetheless, private credit has emerged as a highly attractive source of funding for smaller and mid-sized companies — and we expect
it to grow further. According to Preqin, private credit is projected to hit $2.3 trillion in assets under management by 2027. Private credit
markets are most developed in the US, but are also beginning to take share in the European leveraged loan market. In addition, select
large investment and commercial banks are now setting up business units to compete directly in private credit, pointing to new areas
of risk.
9 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
In 2024, we believe large banks in the broadly syndicated loan market (BSL) — which have lost significant leveraged loan share to
private credit rivals in recent years — will be competing aggressively as new leveraged buyouts (LBOs) emerge, after a sharp drop in
LBO activity over the past two years. Private credit lenders have been building a considerable arsenal of dry powder — capital that must
be put to work. This will likely raise pressure on loan pricing and terms, eroding credit quality and fueling systemic risks.
As LBO competition grows, stronger borrowers will access the BSL market, which provides cheaper pricing and more flexible
documentation than private credit. When targeting the BSL market, most private equity-sponsored entities now build their balance
sheets to achieve a B2 or higher rating. This is because growing investor risk aversion has pushed many B3 credits – once favorites of
the BSL market – into private credit, which caters to smaller, more highly leveraged companies. And unlike BSL lenders, private credit
functions outside the purview of prudential regulators.
Political instability, dollarization and sovereign liquidity constraints will remain risks mainly in emerging market banks
Banks will face policy uncertainties stemming from a heavy calendar of elections in 2024, including in the US, UK, India, Mexico,
Turkiye and South Africa. Military coups in Africa’s Sahel region will also expose banks to uncertainties.
However, political instability in Latin America will stem from new and upcoming governments in Mexico and most recently in
Argentina and Guatemala (Ba1 stable) following presidential elections. On 19 November, Argentine voters elected Javier Milei, a
libertarian who faces substantial difficulties navigating macroeconomic adjustments. Potential for social unrest could again hinder
interest in investing in the region, especially in Peru (Baa1 negative), Colombia (Baa2 stable) and Chile (A2 stable). Chile is debating
various reforms and a late-2023 constitutional referendum.
The operating environment for CIS banks is prone to geopolitical risks from the continuing military conflict between Russia and Ukraine
via a potential disruption or decline in economic links with Russia; as well as unresolved territorial disputes. CIS countries continue to
adjust to the new landscape.
High US dollar use will continue to expose banks to higher risks and exposes those economies to the US monetary cycle. These
exposures are highest in Uruguay (Baa2 positive), Peru, Paraguay (Ba1 positive), Panama (Baa3 stable) and Central America, as well as in
Mongolia (B3 stable). Strict underwriting standards will limit banks' credit risk exposure to currency devaluation.
In Africa, Egypt (Caa1 stable), Kenya (B3 negative) and Tunisia (Caa2 negative) have large refinancing needs, including in foreign
currency, and are among the most exposed to debt rollover risk or higher interest rates further weakening debt affordability.
Hence, banks in Tunisia, Kenya and Egypt are among banking systems in Africa with material exposure to sovereigns facing liquidity
constraints, a risk they share with institutions in El Salvador (Caa3 stable).
As of September 2023, a total of 312 banks had endorsed the voluntary3 disclosure framework recommended by the Task Force on
Climate-Related Financial Disclosures (TCFD)4, up from 180 as of October 2021 and 92 as of March 2020. Of these banks, 55% are
in Asia-Pacific, 29% in Europe, 14% in the Americas and 2% in Middle East and Africa. These banks account for a large proportion of
banking assets in each region: 59% in Asia, 58% in Europe and 76% in North America. Reporting on sustainability finance opportunities
is increasing but there are risks associated with greenwashing as well.
10 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 16
TCFD supporters account for a high and rising share of banking assets in most advanced economies
Proportion of TCFD supporters in domestic banking assets (%)
Buckets reflect the proportion of a territory's banking assets tied to banks that support the TCFD framework. The darker the color, the higher the proportion of banking assets from TCFD
supporters.
Source: Company and central banks' data, Bank for International Settlements, Moody's Investors Service
Profitability improvements will fade on higher funding costs, lower loan growth and loan-loss
provisioning needs
Profitability gains over the last two years will likely start to subside, but profitability will remain sound. Rate hikes since 2021 and 2022
pushed asset yields higher into 2023, boosting net interest income. Moving into 2024, as central banks pause rate hikes and funding
costs catch up, we expect net interest margins (NIMs) will likely remain stable or fall slightly. In the US, NIMs have already started
to decline on rising funding costs that outpaced the rise in asset yields, which has led to lower profitability. At the same time, higher
interest rates will push down revenue from segments such as mortgage banking and asset management. NIMs will be slower to recede
in Western Europe and in Asia-Pacific continue to benefit from loan repricings, with a relatively more gradual pass through to funding
costs. Banks with extensive capital market franchises will benefit from diversification.
11 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 17 Exhibit 18
Profitability benefitted from higher interest rates and lower loan- Net interest margins will fall on higher funding costs and lower
loss provisions loan growth
Weighted-average net income / tangible assets per region Weighted-average NIM per region
2019 2020 2021 2022 1H2023 2019 2020 2021 2022 1H2023
5.0% 6%
4.5%
4.0%
5%
3.5% 4%
3.0%
2.5% 3%
2.0%
1.5% 2%
1.0% 1%
0.5%
0.0% 0%
Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference. Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference.
Source: Moody's Investors Service Source: Moody's Investors Service
Among some emerging markets, favorable operating environments will drive loan growth dynamics. Loan growth in CIS, which has
the highest levels of expansion in our cohort of regions, will ease but will remain healthy, supported by continuing economic growth,
government programs and expected easing of monetary policies, after benefiting from economic recovery following lockdowns and
wider client base from immigrants and capital from Russia. Loan growth will be stronger in Latin America, as loan demand increases
with lower policy rates, supported by relatively higher deposit growth (Exhibit 19). In the Gulf Cooperation Council (GCC), loans
will moderate, except in Saudi Arabia (A1 positive), where loan demand is high. In Africa, rapid loan growth will continue to reflect
increasing banking penetration, from relatively modest levels, combined with elevated local inflation levels.
Exhibit 19
Loan growth will slow from peaks in 2021 and 2022
Weighted-average annual loan and deposit growth
Loan growth Deposit growth
45%
35%
25%
15%
5%
-5%
1H2023
1H2023
1H2023
1H2023
1H2023
1H2023
1H2023
1H2023
2020
2022
2019
2020
2021
2022
2019
2020
2021
2020
2022
2019
2021
2022
2019
2020
2021
2022
2020
2022
2019
2021
2022
2019
2021
2022
2019
2021
2020
2019
2021
2020
North America Euro Zone and UK Asia-Pacific Africa CIS East & Southeast GCC Latin America
Europe
Asia-Pacific H1 2023 does not include Japanese banks because of a difference in the fiscal year. For Euro Zone and UK we used European Central Bank, Eurostat and Bank of England's data.
Deposits in CIS in 2022 benefitted from a wider client base from immigrants and capital from Russia.
Source: Moody's Investors Service, European Central Bank, Eurostat and Bank of England's data
12 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
In 2023, banks in some regions began to increase provisioning expenses and we expect these to continue to creep up, in line with
tighter financial conditions (see Exhibit 20). Many banks built up reserves during the pandemic (Exhibit 12) and they will help limit
increases in provisioning costs into 2024.
Exhibit 20
Loan-loss provisioning needs will continue to creep up in 2024
Weighted-average provisioning expenses to gross loans per region
2019 2020 2021 2022 1H2023
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
North America Western Europe Asia-Pacific Africa CIS East & Southeast GCC Latin America
Europe
Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference.
Source: Moody's Investors Service
Exhibit 21
Global investment banks and universal banks will benefit from a nascent recovery in capital markets activity
FICC Equities Investment Banking Annual average
30
25
$ billions
20
15
10
0
Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 Q2-23 Q3-23
Banks included are Bank of America Corporation (BAC, A1 stable), Barclays PLC (BCS, Baa1 stable, baa1), BNP Paribas (BNP, Aa3 stable, baa1), Citigroup Inc. (C, A3 stable), Deutsche Bank
AG (DB, A1 stable, baa2), The Goldman Sachs Group Inc. (GS, A2 stable), Société Générale (GLE, A1 stable, baa2), HSBC Holdings PLC (HSBC, A3 stable, a3), JPMorgan Chase & Co. (JPM,
A1 stable) and Morgan Stanley (MS, A1 stable).
Source: Moody's Investors Service
13 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 22
Further efficiency gains will be offset by inflation and investment needs
Cost-to-income ratio
2019 2020 2021 2022 1H2023
70%
60%
50%
40%
30%
20%
10%
0%
North America Western Europe Asia-Pacific Africa CIS East & Southeast GCC Latin America
Europe
Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference. That results in a sharp drop in the cost-to-income ratio for Asia-Pacific, because Japanese banks'
cost-to-income ratio is much higher, at 64.2% as of year-end 2022.
Source: Moody's Investors Service
A proposed increase in regulatory capital requirements for all US banks with assets above $100 billion is credit positive. However, in
the near term it will come with increased costs that could undo efficiency gains since 2020 (Exhibit 22) and may entail business model
changes that strain profitability and expose banks to transition risks.
In Europe, new windfall taxes, either approved or under discussion, stand to hurt profitability following gains from the last few years.
The most recent initiative is in Italy, where an initial windfall tax on net interest income was softened to make it less negative if banks
allocate multiples of the tax to their reserves. In May, parliament in Lithuania (A2 stable) approved a windfall tax, which followed
similar taxes in Spain (Baa1 stable) and Hungary in 2022.
Funding and liquidity will be more challenging because of monetary policy tightening
Higher policy rates have led to shifts in funding that are straining banks, especially in North America and Western Europe, while funding
conditions for banks in Asia-Pacific will be less difficult, given largely deposit-based funding mixes and limited reliance on wholesale
sources.
Deposit growth has decelerated and, in some instances, contracted as funds move to more expensive accounts from sight deposits
(including current, checking or demand deposits) to term deposits or go outside banking systems entirely (Exhibit 23). At the peak of
pandemic-driven lockdowns, direct support measures for individuals and small businesses along with central bank liquidity injections
triggered high deposit inflows in most banking systems and an increase in cheap sight deposits. We expect banks with more diversified
and deeper franchises to fare better than those with more concentrated, less granular or more wholesale funding mixes, or new
entrants. To varying degrees, we expect these patterns to continue into 2024.
14 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 23
Deposit growth will continue to decelerate, straining smaller, less-diversified banks
Weighted deposit growth per region
2019 2020 2021 2022 1H2023
60%
50%
40%
30%
20%
10%
0%
North America Euro Zone and UK Asia-Pacific Africa CIS East & Southeast GCC Latin America
Europe
Deposit growth among the eight largest US banks contracted, leading to a slight contraction, however, deposits grew in North America overall, aided by deposit gains at specific large
regional banks such as Capital One Financial Corporation (Baa1 negative) and U.S. Bancorp (A3 negative), and Canadian banks, some of which was driven by acquisitions. Asia-Pacific H1
2023 does not include Japanese banks because of a fiscal year difference. For Euro Zone and UK, we used European Central Bank, Eurostat and Bank of England data.
Source: Moody's Investors Service, European Central Bank, Eurostat, Bank of England
In the US, the Federal Reserve's quantitative tightening will continue to lower bank cash levels and deposits. We expect US deposits
to fall to a level more comparable to its pre-pandemic trajectory (see Exhibit 24), which will lead some banks to rely more heavily on
wholesale and non-core deposits. US businesses and consumers are drawing down liquidity to fund consumption and investment.
We expect similar concerns in Western Europe, where deposit growth will continue to lose momentum as excess savings decline and
customers look for higher yielding alternatives, including off-balance sheet products. Deposit mixes will continue to gradually shift
away from sight deposits to more expensive but longer-term deposits (see Exhibit 25).
Exhibit 24
US banks will see deposits decline, returning to pre-pandemic levels
Recession $ US banking system deposits (LHS) $ Pre-pandemic projection of deposit (LHS) Deposit growth y/y (RHS)
$25 25%
$20 20%
$15 15%
in trillions
$10 10%
$5 5%
$0 0%
-$5 -5%
15 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 25
Western European deposits shift away from sight to term
Year over year (YoY) of euro area and UK deposits growth by loan type
Total Deposits YoY change Overnight Deposits YoY change Term Deposits YoY change
25%
20%
15%
Euro Area + UK
10%
5%
0%
-5%
-10%
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Jun-23
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Source: European Central Bank, Eurostat, Bank of England
However, we expect most large global systemically important banks (G-SIBs) as well as strong domestic banks to benefit from their
deep core deposit franchises. These banks generally maintain low loan-to-deposit ratios that in most instances are well below 100%
(see dotted line in Exhibit 26) and allow decelerating loan growth to better preserve liquidity as deposit funding remains tight.
Exhibit 26
Large banks globally benefit from deep deposit franchises
Loan-to-deposit ratios of global systemically important banks6 and select large banks in EMs
Q2 2023 2020
140%
120%
100%
80%
60%
40%
20%
0%
ITUB
WFC
GLE
SMFG
TD
MS
GS
BAC
SAN
HSBC
BPCE
ABC
C
STT
ING
SBG
BBVAMX
SBIN
SCBFF
DB
CCB
BOC
JPM
UCG
PPERF
UBS
BCS
BNP
ACA
TCZB
BK
MUFG
MHFG
SNB
RBC
ICBC
The Toronto-Dominion Bank (TD, Aa1 stable, a1), Royal Bank of Canada (RBC, Aa1 stable, a2), The Bank of New York Mellon Corporation (BK, A1 positive), State Street Corporation
(STT, A1 negative), Wells Fargo & Company (WFC, A1 stable, a2), Banco Santander S.A. (Spain) (SAN, A2 stable, baa1), UBS Group AG (UBS, A3 positive), Crédit Agricole S.A. (ACA, Aa3
stable, baa2), Standard Chartered PLC (SCBFF, A3 stable, baa1), BPCE (A1 stable, baa1), UniCredit S.p.A. (UCG, Baa1 stable, baa3), Sumitomo Mitsui Financial Group, Inc. (SMFG, A1
stable), Mitsubishi UFJ Financial Group, Inc. (MUFG, A1 stable), Mizuho Financial Group, Inc. (MHFG, A1 stable), China Construction Bank Corporation (CCB, (A1 stable, baa1), Industrial &
Commercial Bank of China Ltd (ICBC, A1 stable, baa1), Agricultural Bank of China Limited (ABC, A1 stable, baa2), Bank of China Limited (BOC, A1 stable, baa1), Itaú Unibanco Holding S.A.
(ITUB, (P)Ba3), BBVA Mexico, S.A. (BBVAMX, Baa1 stable, baa2), T.C. Ziraat Bankasi A.S. (TCZB, B3, stable, caa1), State Bank of India (SBIN, Baa3 stable, ba1), Bank Mandiri (Persero) Tbk
(P.T.) (PPFERF, Baa2 stable, baa3), Saudi National Bank (SNB, A1 positive, baa1) and Standard Bank Group Limited (SBG, (P)Ba3). Japanese banks SMFG, MUFG and MHFG and India's SBIN
show latest 2022 year-end data.
Source: Company filings, Moody's Investors Service
Large banks will also fare better as non-core deposits and market funding increase to compensate repayment of central bank money
and declining deposit growth in major markets (Exhibit 27). Large volumes of stable deposits and strong domestic capital market
demand are key strengths that will support funding and liquidity in many banking systems. While deposit concentration is generally
high among GCC banking systems, ample liquidity buffers will temper risk.
16 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 27
Market funding will increase to compensate repayment of central bank money and declining deposit growth in major markets
Market funds / Tangible banking assets
2019 2020 2021 2022 1H2023
35%
30%
25%
20%
15%
10%
5%
0%
North America Western Europe Asia-Pacific Africa CIS East & Southeast GCC Latin America
Europe
Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference.
Source: Moody's Investors Service
Banks globally were unusually liquid during the years of quantitative easing, and this has been reversing. Since 2021, holdings of liquid
assets have fallen but remain ample, considerably higher than 30% of tangible banking assets with high liquidity coverage ratios that
are well above 100%, as of first half 2023 (Exhibits 28 and 29). Basel standards in Europe and most parts of Asia-Pacific, and among
large universal and global banks, will continue to ensure ample liquidity. We expect banks in Western Europe to maintain ample
liquidity even if it eventually converges with pre-COVID levels as targeted longer-term refinancing operations (TLTROs) and similar
schemes run off. Foreign currency shortages — amid tight global funding conditions — will constrain liquidity in some frontier markets
in Africa.
Exhibit 28 Exhibit 29
Liquid assets remain ample despite some falls Liquidity coverage ratios have also fallen in some regions, but
Weighted-average liquid asset / tangible banking assets per region remain above 100%
Weighted-average liquidity coverage ratio per region
2019 2020 2021 2022 1H2023 2019 2020 2021 2022 1H2023
60% 250%
50%
200%
40%
30%
150%
20%
10% 100%
0%
50%
0%
US GIBs and Western Europe Asia-Pacific East & GCC
Canada Southeast
Europe
Asia-Pacific H1 2023 does not include Japanese banks because of a fiscal year difference. We have excluded regions where fewer than half of banks report liquidity coverage ratios.
Source: Moody's Investors Service For US GIBs, we included BAC, C, GS, JPM and MS. Asia-Pacific H1 2023 does not include
Japanese banks because of a fiscal year difference.
Source: Moody's Investors Service
17 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
emerging technology. Banks could benefit from the efficiency and the creation of new product offerings through asset tokenization in
areas such as fixed income, foreign exchange and wealth management.
Major US banks such as JPMorgan and Goldman Sachs have been investing heavily in this area to develop new capabilities and gain a
competitive edge. This will enable them to support clients willing to explore digital finance opportunities in areas such as digital bonds
or repos. Dubai (United Arab Emirates, Aa2 stable)7, Hong Kong, the EU and Singapore have recently created new licensing procedures
for cryptoasset service providers that will support digital bond market growth.
We also expect banks to be active in issuing new types of climate-focused instruments (e.g., blue bonds, debt for nature swaps)
to complement their diversified funding sources. In 2023, we expect global sustainable bond issuances to reach $950 billion, only
slightly below the 2021 peak of $1.1 trillion, despite a third quarter decline in line with the global bond market's 22% decline. Financial
institutions, where banks represent the bulk, represent nearly one-fourth of 3Q's sustainable bond issuances.
Exhibit 30
Capital is highest among European banks, but new regulations will boost North American banks' levels, too
Weighted-average Tangible Common Equity to risk-weighted assets
2019 2020 2021 2022 1H2023
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
North America Western Europe Asia-Pacific Africa CIS East & Southeast GCC Latin America
Europe
Authorities in Asia-Pacific are adopting and adapting the final Basel III rules that will reduce excessive differences in risk-weighted assets
and strengthen bank capital. Banks in Australia, Indonesia, Japan (A1 stable) and Korea have implemented them while those in China,
Hong Kong, Malaysia (A3 stable) and Singapore will follow suit. Impacts on transitional and final regulatory capital ratios vary across
the region. Banking systems that have established Basel III rules reflect unrealized gains/losses in their regulatory capital ratios related
to available for sale (AFS) and trading securities.
African banks will likely remain well capitalized and continue to gradually roll out stricter Basel capital regulations, although progress
will vary widely.
18 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Rising funding and regulatory costs, lower revenue and muted loan growth will limit profitability. Bank funding costs have
increased sharply and will remain high, squeezing NIMs and net interest income. At the same time, higher interest rates will weigh
on mortgage banking and asset management revenue. Large US and Canadian banks' extensive capital markets franchises distinguish
them from the broader North American banking universe, presenting both a differentiated earnings stream driven by capital markets
activity as well as an additional set of risks. US banks will face significantly higher compliance costs because of regulatory proposals.
For some, these problems may pose obstacles to building capital organically. Many banks will struggle with operating costs rising faster
than revenue while managing technology investments and rising wages.
Commercial and industrial (C&I) and commercial real estate (CRE) loans and consumer credit metrics will continue to
weaken. Higher interest rates have increased debt-servicing costs and refinancing risks for some borrowers, while tighter financial
conditions are slowing business and consumer activity, reducing liquidity and incomes. Small and mid-size regional banks in the
US typically have higher CRE loan exposures, which are likely to give rise to higher losses from the stress of higher interest rates
and pandemic-driven structural shifts. Together with a rise in unemployment, this will lead to rising problem loans, driving North
American banks to build loan-loss reserves. The reserve build's magnitude will depend on the degree to which unemployment increases,
corporate defaults rise and consumer and business debt-servicing capacity weakens. US regional banks’ reserve coverage tends to be
less conservative than those of US G-SIBs. Growing private credit markets that pose contagion risk to the banking system tend to
finance weaker and highly leveraged borrowers who are susceptible to higher interest rates.
Capitalization is a credit weakness for most US regional banks, while US G-SIBs and Canadian banks maintain higher
capital. US interest rate risk in the banking book has not been subject to quantitative regulation, and some US banks have
accumulated significant unrealized losses on investment securities which has led to lower tangible equity. We expect US banks with
assets greater than $100 billion to build regulatory capital in light of proposed changes to capital regulation. The two-tier US system of
bank regulation is credit negative for banks with assets below $100 billion, because these banks are subject to less stringent regulations.
Capital levels for Canadian banks have generally risen to meet new regulatory expectations, but further substantial increases are
unlikely, absent further regulatory shifts.
Funding and liquidity will remain a challenge for US banks because of monetary tightening, while Canadian banks' deposit
growth remains strong. The Fed's monetary tightening policy has both increased deposit costs and reduced US banking system
deposits. As a result, the funding picture will vary among banks as financial conditions tighten. The Fed’s quantitative tightening will
continue to lower US bank cash levels and deposits, as will businesses’ and consumers' drawing down of liquidity to fund consumption
and investment. North America’s largest banks have strong retail deposit franchises, but some are using more wholesale funding
and non-core deposits. In contrast to the US, Canadian banks’ deposit growth remains strong. Also, Canadian banks have been very
proactive in wholesale markets given the macroeconomic uncertainty and heightened geopolitical tensions, resulting in market funding
rising to pre-pandemic levels.
For most banks, little change in exposure to environmental risks (moderate) and social risks (high). Environmental risks largely
stem from banks' portfolio exposure to carbon transition risk, which sector diversification in loans mitigates. In addition, higher-than-
expected catastrophe losses and heightened claims severity have driven some property and casualty insurers to be more selective in
writing new homeowners insurance policies, which may harm North American banks’ residential mortgage and commercial real estate
portfolios. High exposure to social risks for most banks is related to regulatory and litigation risk associated with requiring banks to
meet high compliance standards. This includes data security and customer privacy concerns heightened because of banks' access to
customers’ personal data. North American banks' low governance risks, supported by sound financial strategy and risk management,
mitigate these risks.
19 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Loan performance will weaken, but only moderately. Although the problem loan ratio remains broadly unchanged and there are
limited signs of loan quality deterioration, with Stage 2 loans stabilizing in most countries, the knock-on effects of elevated interest
rates and core inflation will weigh on borrowers' repayment capacity, mainly for large companies' and SMEs' lending. We also expect
loan performance deterioration in specific classes, such as commercial real estate, where borrowers struggle with the combination of
higher refinancing rates and lower collateral values. Household savings have broadly returned to pre-COVID levels after exceptionally
high disposable income since the 2020 peak. Loan deterioration will remain restrained and supported by tight labor markets —
unemployment is at its lowest since 2008 — with sector and country variation and reasonable corporate leverage. Loan-loss reserves,
built up since the pandemic's outbreak, will help absorb new problem loans.
After significant improvement, profitability will stabilize. Following very strong profit growth from rapid and significant policy
rate increases that boosted NIMs, particularly for banks in countries where variable-rate lending predominates, we expect profitability
to stabilize in 2024. While the full repricing of loan books will go on for some quarters, we expect the positive impact on NIMs to
start to fade as higher rates pass through to depositors gradually and feed through to higher borrowing costs in wholesale markets.
Repayment of central bank money will also put further strain on deposit pricing as competition in some countries for deposits
increases. As policy rates have peaked for most central banks, we expect banks to increasingly hedge their balance sheets to protect
their margins from lower interest rates. Windfall taxes are moderating margin benefits in several jurisdictions. Still-strong profitability
will help absorb marginally higher risk costs.
Capital buffers will remain ample. We expect capital to remain broadly unchanged in 2024, underpinned by still-strong internal
capital generation and overall flat RWAs. Banks may continue to return excess capital to shareholders in the form of dividends and
share buybacks, but we expect them to maintain sizable capital headroom over regulatory requirements. The banking sector’s resilience
to adverse shocks was confirmed by the results of stress testing by the European Banking Authority and the Bank of England.
Lower liquidity buffers and more price-sensitive funding. In an environment of high interest rates and lower support from central
banks, we expect (i) deposit growth will continue to lose momentum as excess savings decline and customers look for higher yielding
alternatives, including off-balance sheet products; (ii) deposit mixes will continue to gradually shift away from sight deposits to more
expensive but longer-term deposits; and (iii) banks’ liquidity buffers decline to more normal levels as Targeted longer-term refinancing
operations (TLTRO) and Term Funding Scheme with additional incentives for SMEs (TFSME) funds are returned. Limited loan growth
will partly temper funding pressure as a sizable share of bank bonds mature over the next few years.
20 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Loan quality will remain broadly stable — except for a few markets with high household leverage and/or a real estate
market downturn. Problem loan ratios will either remain stable or increase moderately as higher interest rates start to bite. Exposure
to real estate and its related sectors, such as construction, remains a key risk for banks in mainland China, Hong Kong, Korea and
Vietnam, with the risk for Hong Kong banks largely stemming from their commercial property loans in mainland China. Meanwhile,
asset risks for Chinese banks will increase from the country’s economic slowdown as well as the prolonged stress among property
developers and local government financing vehicles.
Profitability will stabilize in the pandemic recovery, except for Chinese and Indian banks. NIMs will remain stable as central
banks pause rate hikes and funding costs catch up. Provisioning expenses will remain stable, supported by not fully used loan-loss
reserves accumulated during the pandemic. Banks are reaping efficiency gains from digitalization and branch closures, but inflation and
rising tech-related expenditures will limit any decrease in cost-to-income ratios. Indian banks' profitability will increase further on lower
provisioning expenses and robust growth in higher-yielding retail segments. Japanese banks could benefit from a NIM upside as the
central bank looks to move from its ultraloose monetary policy amid elevated inflation and potential wage hikes. Meanwhile, NIMs at
Chinese banks will contract further on loan repricing after the central bank's policy easing and the flow of funds to more expensive time
deposits.
Capital will remain broadly unchanged. Organic capital generation, coupled with prudent dividend policy, will keep pace with asset
growth. Authorities are adopting and adapting the final Basel III rules that will reduce excessive variability in risk-weighted assets and
strengthen bank capital. Banks in Australia, Indonesia, Japan and Korea have implemented them while those in China, Hong Kong,
Malaysia and Singapore will soon follow suit. Impacts on transitional and final regulatory capital ratios will vary across the region.
Funding and liquidity will remain stable. Banks will remain well-funded by deposits and not rely heavily on wholesale sources.
They will also continue to have more than sufficient liquidity to meet debt and deposit obligations, partly because of adherence to
prudential regulations for net stable funding ratio and liquidity coverage ratio.
Carbon transition is a work in progress. An increasing number of banks have set interim targets and strategies to achieve net
zero. They are incorporating climate risk management and disclosing climate-related information based on Task Force on Climate-
Related Disclosures guidelines. As a result, more banks are directing funds to sustainable financing while cutting exposure to those that
are carbon-intensive. They are also supporting customers’ carbon transition by offering sustainability-linked loans and helping them
structure similar bonds.
21 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Africa, negative
Operating conditions will remain difficult, but banks are accustomed to navigating turbulence. Africa’s real GDP growth will
be around 3.9% in 2024 (compared to around 3.5% in 2023), which is still below the continent’s potential. Elevated inflation will
continue to dent households' purchasing power, weighing on real growth and increasing social discontent and political risks. Many
countries will face external vulnerability risks, as strained foreign-exchange reserves limit foreign-currency liquidity and economic
activity. Nonetheless, the banking sector’s sophistication and experience will help contain some shocks to the operating environment in
several jurisdictions.
Significant sovereign exposure poses risks to loan quality. Egypt, Kenya and Tunisia have large refinancing needs, including in
foreign currency, and are among the most exposed to debt rollover risk or higher interest rates further weakening debt affordability.
Ghana (Ca stable) completed its local currency debt restructuring in 2023, but its foreign-currency debt restructuring remains pending.
Sovereign debt exposure links banks’ creditworthiness with that of the sovereign, and is highest in Egypt, Kenya, Ghana, Tunisia and the
West African Economic and Monetary Union (WAEMU). Separately, we expect loan performance to weaken amid elevated inflation and
interest rates.
Solid capital provides buffers against asset deterioration, but potential local currency depreciations pose risks. African banks
will likely remain well capitalized and continue to gradually roll out stricter Basel capital regulations, although progress will vary widely.
Further material depreciation in several countries’ local currencies will potentially weaken capitalization for banks carrying a short net
open position, or with significant exposure to unhedged foreign-currency borrowers. Separately, potential debt restructuring in some
countries poses tail risks to domestic banks’ capitalization.
Profitability will improve on high rates, but forbearance will mask weaker underlying earnings. High interest rates will
continue to support banks’ NIMs, which is their main source of operating income. However, elevated inflation and local currency
depreciation will raise banking operating costs and strain borrowers’ purchasing power and repayment capacity, leading to higher loan-
loss provisions. Regulatory forbearance, along with underreported problem loans in some markets, will obscure some underlying loan
quality deterioration and limit increases in provisioning requirements.
Local-currency funding will be stable. Reliance on foreign-currency funding is limited. African banks will remain primarily deposit-
funded in local currency. However, tight global conditions will increase costs for those raising funding in eurobond debt capital markets.
This is partly offset by banks’ access to affordable foreign-currency funding from development financial institutions, along with African
banks’ relatively limited reliance on foreign-currency funding. Most upcoming eurobond maturities are due from banks in Nigeria (Caa1
stable), South Africa and Togo (B3 negative), including a few in 2024-25 and a more sizable number in 2026.
Foreign-currency shortages will pose risks to banks’ liquidity. Local corporate clients’ foreign-currency shortages in some
countries present risks to local banks’ foreign-currency liquidity through their trade financing. Banks’ experience in sizing their trade
exposures, collecting cash and ensuring that clients can source foreign currency will mitigate risk. However, banks benefit from strong
and stable local-currency liquidity through their broad and diversified bases of customer deposits.
22 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Loan quality will remain supported by the operating environment. After improvement in Kazakhstan and Azerbaijan in 2022,
loan performance will stabilize, while positive trends will continue in Armenia and Uzbekistan. Favorable economic conditions will be
weighed against still-elevated risks from high interest rates or recognition of previously unrecorded problem loans in Kazakhstan, or
both.
Capital will be stable in most CIS countries. Good profit will support capitalization despite planned asset growth and dividend
payouts. In Kazakhstan, loss-absorption capacity is increasing as banks recognize previously unreported problem loans and set aside
increased provisions as required by the regulator.
Profitability will likely decline, but remain above historical levels in most cases. After the start of the Russia-Ukraine war in
2022, banks in many CIS countries benefited from abnormal foreign-exchange revenue from higher trade and remittances, capital
inflows and migration from Russia. In the next 12-18 months, most banks’ performance will decline as gains gradually reduce on lower
local currency volatility and less trade and capital exodus from Russia. However, banks' results will be above historical levels as key
drivers supporting foreign-exchange revenue remain and margins stay high. Interest margins will remain boosted by high interest rates,
while the lower cost of risks (e.g. Armenia, Uzbekistan) will also support profitability.
Liquidity will remain good. While loan book growth may start to outpace deposits (which will grow with favorable economic activity
and high inflation in some countries), we expect liquidity will remain robust in most CIS banking systems. Refinancing risks are unlikely
to increase. Regional geopolitical risks will impede banks’ access to foreign wholesale borrowings. At the same time, high market rates
make domestic wholesale borrowing expensive. Existing wholesale facilities give rise to only limited risk as they mostly consist of long-
term funding from parent foreign banking groups, government funds to support economic programs and loans from international
financial institutions. While we do not expect a sharp reversal of the financial and labor flows back to Russia from Armenia (which
was key beneficiary of Russian migrants’ inflows) over at least the next two to three years, a steady outflow of nonresident deposits is
possible if labor moves to other regions.
Government support for most systems’ banks will be forthcoming on sustained fiscal capacity. Governments’ role in banking
varies: for banks in Kazakhstan, Azerbaijan and Uzbekistan, the largest or state-owned banks will continue to benefit from government
support. Kazakhstan’s improving fiscal capacity (as reflected in a positive outlook on its sovereign rating) will mean a greater ability to
support banks as its strength improves. In Armenia, capacity for support will remain limited because of the system’s high dollarization.
Exposure to governance risks is a key concern. Concentrated ownership, loose risk-management practices and high related-party
transactions dominate many CIS banks’ risks, weakening their financial performance. Some banks, such as in Kazakhstan and Azerbaijan,
are heavily exposed to carbon-transition risks, given local economies’ dependence on oil and gas industries.
23 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Favorable operating conditions reinforce strong loan quality. We expect problem loans to remain low for the outlook period
(GCC average of 3.2% as of June 2023). Strong real estate and construction sector performances (historically the largest contributors
to problem loans) and moderate credit growth will support banks’ loan performance. Coverage of problem loans already exceeds 100%
in most systems.
Capital will remain strong. GCC banks have historically maintained strong capitalization and we expect the same for the outlook
period (average TCE/RWAs of 15.3% as of June 2023). High loan-loss reserves support banks’ loss-absorption capacity.
Liquidity buffers will stay ample. While deposit concentration is high, ample liquidity buffers that we expect to remain high (28%
of tangible banking assets as of June 2023) will temper risk. Credit growth will be moderate except in Saudi Arabia, where demand for
loans is high.
Profitability will remain strong. Many GCC banks reported record profit in 2023 supported by higher margins from higher rates,
increased business volumes and lower loan-loss provisions. Return on assets was on average a solid 1.7% during the first half of 2023.
We expect GCC banks’ profitability to remain strong, supported by low provisioning requirements and high margins.
Banks have high indirect exposure to carbon transition risks but social risks are low. GCC banks lend primarily to the non-oil
sectors and have small direct exposure to carbon transition risks. Nevertheless, the health of GCC economies tracks changes in oil
prices and government spending remains the main profit driver for non-oil businesses. GDP per capita in the Gulf region is among the
highest globally, housing is subsidized and job security is high for nationals, keeping social risks low.
GCC governments’ bank support will remain high/very high while capacity is improving in some cases. Governments’ role
in banking systems varies — as the largest borrower, depositor or shareholder. In all cases, governments’ willingness to support banks
remains strong. Capacity is improving in some spots as reflected by the positive outlook on the sovereign’s issuer ratings.
24 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Banks will maintain ample reserves and strict origination rules, leading to a gradual improvement in delinquencies in 2024.
Lower inflation and interest rates will help borrowers’ repayment capacity and banks will preserve loan-loss reserves. In Brazil and
Colombia, where loan portfolios are more exposed to consumers and SMEs, banks will keep a conservative approach to credit, shifting
lending to secured loans. The phaseout of government-support programs (Peru and Panama) will result in more problem loans, but
they largely have been well provisioned. High dollar use in Uruguay, Peru, Panama and Central America will continue to expose the
banks to higher risks and exposes those economies to the US monetary cycle. Strict underwriting standards limit banks' exposure to
currency devaluation.
Profitability will remain stable despite declining rates, with higher business volumes and lower provisioning needs. Margins
will remain ample, with growing lending activity offsetting portfolio repricing and higher funding costs. Investments in innovation and
more stable sources of income, such as fees and commissions, will continue to support earnings.
Ample profitability will sustain stable capitalization. Buffers against regulatory minimums are large. Good profitability will enable
banks to meet rising regulatory requirements related to Basel III adoption in Peru and Chile, while TLAC in Mexico will ensure loss-
absorption through ample volumes of hybrid instruments.
High domestic liquidity will help banks avoid tight financial conditions elsewhere. Low reliance on international capital markets
will limit the effect of global volatility on Latin American banks. Large volumes of stable deposits and strong domestic capital market
demand are key strengths. Lower policy rates will ease financing at smaller institutions.
Government support remains ample. As the region's banks accumulate loss-absorbing hybrids, the need for government support
will lessen.
25 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
26 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
27 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Endnotes
1 Member states are Brunei, Cambodia (B2 negative), Indonesia, Laos (Caa3 stable), Malaysia, Myanmar, Philippines, Singapore, Thailand (Baa1 stable) and
Vietnam.
2 Current Expected Credit Loss accounting, which large U.S. banks implemented on 1 January 2020.
3 Since the launch of TCFD recommendations, a few countries, such as the UK, New Zealand (Aaa stable), Japan (A1 stable) and Switzerland (Aaa stable),
have made TCFD disclosures mandatory for financial institutions or large companies, with various implementation dates.
4 The TCFD is a working group that aims to create a set of comparable and consistent disclosures that companies can voluntarily use to demonstrate climate
change resilience to their stakeholders. The project focuses mainly on how climate change will affect organizations, rather than how organizations affect
the environment. Key disclosure recommendations were published in June 2017. The Financial Stability Board announced that the TCFD would be wound
up after it published its 2023 progress report, as the ISSB will take over responsibility for monitoring climate-related disclosures from 2024. The ISSB
standards have grown out of the TCFD guidelines, formalizing them into a set of reporting standards. Moody's Corporation is a member of the TCFD.
5 US-based global investment and universal banks include Bank of America Corporation (A1 stable), Citigroup Inc. (A3 stable), Goldman Sachs Group Inc.
(A2 stable), JPMorgan Chase & Co. (A1 stable), Morgan Stanley (A1 stable) and Wells Fargo & Company (A1 stable).
6 The global systemically important banks are indicated using their stock symbols where available: The Toronto-Dominion Bank (TD, Aa1 stable, a1), JPM,
RBC, MS, BK, STT, GS, C, BAC, WFC, SAN, UBS, BCS, ING Groep N.V. (ING, Baa1 stable), BNP, ACA, HSBC, Standard Chartered PLC (SCBFF, A3 stable,
baa1), GLE, BPCE (A1 stable, baa1), UCG, DB, SMFG, MUFG, MHFG, CCB, ICBC, ABC, BOC, Itaú Unibanco Holding S.A. (ITUB, (P)Ba3), BBVAMX, TCZB,
SBIN, PPERF, SNB, SBG.
7 The Securities & Commodities Authority (SCA) and the UAE Central Bank (CBUAE) have jurisdiction in Dubai and both have their own virtual asset-
related regulatory regimes. Although those providing virtual asset activities in Dubai are required to comply with CBUAE regulations, there remains some
uncertainty regarding the overlap of the SCA, CBUAE and VARA licensing regimes.
28 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT
COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY,
“PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL
FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S
RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S
CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE
VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT
STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND
RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER
OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER
OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT
RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR.
MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING
THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE,
HOLDING, OR SALE.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE
RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING
AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED
OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE
FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN
CONSENT.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS
DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well
as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it
uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,
MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the credit rating process or in preparing its Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any
indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any
such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or
damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a
particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory
losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the
avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents,
representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT
RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including
corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating,
agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s
Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding
certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service, Inc. and have also
publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance
— Charter Documents - Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors
Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended
to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you
represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or
indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to
the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s
Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally
Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an
entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered
with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services
rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
29 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
30 4 December 2023 Banks – Global: 2024 Outlook - Negative as tight financial conditions and economic slowdown sting