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With credit quality expected to decline as interest rates rise and economic growth slows, global banks will be insulated by the offsetting expansion of net interest margins and their underlying capital strength, says Moody’s Investors Service.

The rating agency said that its outlook for the global banking sector in 2023 is stable, as the banks’ growing interest income and strong balance sheets will counter rising operating costs and increasing impaired loans.

“Banks will report solid profits in 2023,” said Edoardo Calandro, vice president and senior credit officer with Moody’s, in a release.

“Rising interest margins will enable continued capital generation on top of already strong capital, while liquidity and funding will remain robust, even as gloomy economic conditions across much of the world cause loan performance to deteriorate,” he added. “Bank creditworthiness will remain broadly stable.”

The adoption of stricter underwriting standards over the last 10 years — coupled with reduced exposure to riskier asset classes and strong loan-loss provisioning — will help to contain rising credit losses, the report said.

Additionally, Moody’s said that deposits “will likely remain well above pre-pandemic levels for at least the next 12 to 18 months,” which should keep banks well funded throughout 2023 even as central banks reduce liquidity through quantitative tightening.