Although U.S. banks themselves are doing better, the outlook for the banking system remains negative, cautions Moody’s Investors Service.
The rating agency says that macro challenges are expected to continue to pressure banks over the next 12 to 18 months, and that these hurdles outweigh the fact that rating outlooks on most U.S. banks have changed to stable from negative in the past two and a half years.
Bank outlooks have improved, it notes, as their ability to handle risks has been enhanced by larger capital and liquidity buffers. And, since 2010, most banks have returned to profitability, it adds.
“Our negative outlook for the U.S. banking system reflects a challenging domestic operating environment, with prolonged low interest rates, high unemployment, weak economic growth and fiscal policy uncertainties,” says Moody’s senior vice president, Sean Jones. “Additionally, the threat of contagion stemming from the European sovereign debt crisis undermines economic recovery in the U.S. and exposes banks to a heightened risk of shocks.”
The banks remain in recovery mode, Moody’s notes, and that is prone to reversal if the economy takes a turn for the worse. Non-performing asset levels are still high, it says, and legacy issues from the financial crisis, such as the need to run down ‘non-core’ assets, litigation issues, and mortgage repurchase demands, are expected to take years to resolve. Additionally, many banks still have significant asset concentrations, it says.