With the macroeconomic environment expected to bolster profitability for U.S. banks, Moody’s Ratings is upgrading the rating outlook for the sector to stable from negative.
In a new report, the rating agency said that it revised the sector’s outlook higher based on its expectation that further interest rate cuts by the U.S. Federal Reserve Board, along with stable economic growth, will support “moderately higher” profits and steady asset quality.
Moody’s is currently projecting U.S. GDP growth to slow a bit to 1.8% in 2026, down from its forecast of 2% for 2025, before ticking up to 1.9% in 2027.
“The stable outlook also incorporates an expectation that a modest pick-up in loan growth and a steepening yield curve will enhance net interest income, most banks’ primary revenue source,” the report said.
Against that backdrop, Moody’s expects that banks’ revenue growth will outpace rising costs over the next 12 to 18 months. It also expects that non-interest income will rise too, “supported by market valuations that sustain asset and wealth management fees, and with investment banking benefiting from robust pipelines.”
Asset quality is also seen staying stable, “with lower interest rates improving debt affordability for most borrowers.”
However, the report also noted that a weakening labour market will represent a headwind for consumer asset quality, along with other pockets of possible asset risk.
“Potential weaknesses include commercial loans to tariff-affected industries or poorly underwritten exposures to highly leveraged companies, or to private lenders that lend to such companies; multifamily loans in overbuilt markets; and loans to non-prime consumers, who continue to grapple with rising debt burdens and sticky above-target inflation,” it said.
Indeed, there are a number of downside risks to the outlook. They include the prospect of an equity market correction that could undermines key GDP drivers — strong consumer spending, particularly by high-income households, and massive AI investment — along with trade-related uncertainty, geopolitical tensions and political instability.
For the banking sector specifically, Moody’s said it’s also expecting looser regulation, which will result in lower capital requirements for banks. The largest banks have significant capital surpluses and could return more capital to shareholders once regulatory reforms are clarified, it noted — although this would add incremental risk to bank creditors too.