The outlook for banks credit ratings is broadly stable, says Moody’s Investors Service, noting that significant progress has been made in improving the health of global banking systems.
That said, the rating agency also notes that factors such as economic fragility and regulatory reform will also challenge this increased stability. “The improving operating conditions in many parts of the world have alleviated some of the pressure on banks’ overall financial profiles,” said Moody’s vice president and senior credit officer, Robard Williams. “Two-thirds of our global bank ratings carry stable outlooks. .. Yet, we expect this increased stability to be put to the test in 2014 by a variety of economic and regulatory pressures.”
The expected winding down of the U.S. Federal Reserve’s quantitative easing program raises the prospect of an uptick in long-term yields as well as increased short-term volatility across global markets, says Moody’s. This will be a test of policymakers’ ability to maintain low rates, it notes, “and could lead to an increase in borrowing costs and reduce cross-border financing flows, with the potential for negative effects on bank creditworthiness.”
In emerging markets, there are signs of asset price bubbles appearing in a number of countries, stemming partly from significant foreign capital inflows over the past few years, it says; adding that a correction could test the current high profitability and capitalization levels of many emerging market banks.
Moody’s also notes that banks will remain under pressure to continue to reduce their leverage and increase the quality of their capital in 2014, due to a variety of factors — primarily assorted regulatory reforms, such as new stress tests in Europe, and rising capital levels as the Basel III capital framework is implemented.