Although strong underlying economic growth underpins an increasingly rosy credit outlook for the global banking sector, profits are likely to remain under pressure, according to a new report from Moody's Investors Service Inc.
The New York-based credit-rating agency's report states that a broad-based upturn in economic growth, and improving solvency, will underpin creditworthiness in the banking sector in the coming year. Specifically, Moody's expects gross domestic product growth of 3.2% for the G20 economies in 2018 as economic momentum that has been building in 2017 continues into next year.
Nevertheless, profitability in the global banking sector "remains subdued," the Moody's report notes, "as the low [interest] rate environment continues to weigh on returns, and nonperforming loan levels remain stubbornly high in some jurisdictions."
In addition, efforts to reduce costs will be constrained by a number of factors, including technology investments, ongoing restructuring expenses, and regulatory compliance costs, the report states.
"The global banking sector will benefit from favourable credit conditions that include improving economic growth and a supportive funding environment. However, broadly stronger economic growth is not expected to translate into material improvements in bank profitability in the coming year," says Robard Williams, senior vice president at Moody's, in a statement.
"The imperative for banks to boost customer acquisition and retention and improve efficiency through new and improved uses of technology will continue" he adds. "While we do not expect incumbents to lose their position at the center of banking services any time soon, 2018 will bring ongoing challenges to their competitive position."
Moreover, Moody's says that banks will face downside risks from relatively high corporate and household indebtedness as monetary policy in developed markets gradually tightens over the next few years.
"An additional vulnerability would be a significant correction in currently-elevated asset prices," Williams adds, "which would weigh on consumer sentiment and spending, worsen financial conditions for affected firms and push up losses on corporate and consumer loans."
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