However, the agency also warned that geopolitical tensions, trade issues, and potential policy changes in the US could introduce significant risks. Under the new Trump administration, Moody’s expects the US to maintain large fiscal deficits, pursue protectionist trade policies, roll back climate initiatives, adopt a tougher stance on immigration, and relax regulatory controls.
“We have changed the global outlook for banks to stable from negative, reflecting our expectation that stabilisation of economic growth and monetary easing will support operating environments for banks, alleviate pressure on their asset quality and help their deposit growth recover. However, geopolitical conflicts, trade tensions and post-election policy changes in the US create significant uncertainty and risks,” said David Yin, Vice-President – Senior Credit Officer at Moody’s Ratings.
G20 economic growth projections
Moody’s further expects major G20 economies to be shifting from recovery to slower but steady growth in 2025. Moody’s forecasts that real GDP growth for G-20 economies will slow to 2.6% in 2025 and 2.5% in 2026, down from 2.8% in 2024 and 3.0% in 2023. Growth in advanced G-20 economies is expected to moderate slightly to 1.7% in 2025 and 1.6% in 2026, compared to 1.8% in 2024 and 1.9% in 2023.
On the other hand, G-20 emerging markets are expected to experience a decline in growth, with rates falling to 3.9% in 2025 and 3.8% in 2026, down from 4.3% in 2024 and 4.8% in 2023. This slowdown is primarily attributed to weaker growth in China, driven by domestic structural challenges and significant external risks.Capital stability despite Basel III RegulationsBanks are expected to maintain stable capital ratios despite stricter Basel III rules, owing to long phase-in periods. Large banks, in particular, have sufficient buffers to meet higher Common Equity Tier 1 (CET1) capital requirements, noted the ratings agency.
The new Basel III rules enhance risk-weighted asset (RWA) calculations and impose an output floor, ensuring RWAs from internal models cannot be lower than 72.5% of those calculated under a standardised approach. In the EU, this will lead to a 16% increase in capital requirements for large banks, while in the US, the increase is expected to be 9%.
With phase-in periods extending to 2033 in the EU and 2026 in the UK, banks have ample time to adjust. While smaller US banks face less stringent requirements, they have already raised capital in preparation.
Profitability pressure from declining interest margins
Meanwhile, as interest rates fall, banks will likely see lower profit margins. This will be especially challenging for banks in highly competitive markets or those that rely heavily on deposits or floating-rate loans.
“Banks’ profitability will weaken in most systems as net interest margins (NIMs) decline after rate cuts. Pressure on NIMs will be greater in systems where competition is intense, banks are heavily reliant on deposits for funding or large proportions of loans carry floating rates,” noted the Moody’s report.
Deposit growth, liquidity outlook
Deposit growth is expected to recover slightly in 2025, as lower rates make deposits more attractive than other investment options. Banks’ liquidity should remain strong, though government support for banks may be limited in some regions due to fiscal constraints.
Factors that could sway the outlook
Moody’s also noted that the outlook for global banks could turn positive if there is strong economic growth, a reduction in geopolitical tensions, or a recovery in commercial real estate markets. On the other hand, escalating geopolitical conflicts, higher inflation, or renewed monetary tightening could lead to a negative outlook.
Content Source: economictimes.indiatimes.com