a man on a precipice

Citing an array of risks heading into 2021, Moody’s Investors Service has a negative outlook on much of the global banking industry — except in Canada.

The rating agency reported that more than 75% of rated banks now have a negative outlook, compared to just 14% in 2019.

“The likelihood of a financial crisis is low but there is still considerable risk going into 2021, as reflected by the fact that over three quarters of our 70 banking system outlooks – including all G-20 countries except Canada – are negative,” said Sophia Lee, associate managing director at Moody’s.

After years of building up their balance sheets in the wake of the global financial crisis, most banking systems entered the Covid-19 crisis in good shape, Moody’s said.

However, the rating agency warned that “the recent resurgence in coronavirus cases highlights the risk of further economic deterioration.”

For banks, economic disruption would likely lead to higher loan loss provisions, undercutting earnings.

The uncertainty about the trajectory of the virus, along with the winding down of government support measures, which could lead to higher credit costs, “poses considerable risks for banks” heading into 2021, Moody’s said.

Additionally, extremely low interest rates for an extended period would crimp banks’ profits.

These risks underpin Moody’s negative outlooks for the global banking sector, which “broadly reflect the risk that weakening operating conditions, particularly in key sectors such as hospitality and retail, will lead to a deterioration in loan performance and profitability, and potentially undermine confidence in banks, as seen in past crises.”

At the same time, the shift to online banking intensifies the risk of cyberattacks and competition from fintechs, Moody’s added.

Finally, the rating agency noted that intensifying efforts at shifting toward carbon neutrality increase the likelihood that banks will face added ESG disclosure and stress-testing requirements.