KUALA LUMPUR, Dec 4 — Although most banking systems entered the crisis in good shape following a decade of balance-sheet strengthening, the recent resurgence in coronavirus cases highlights the risks of further economic deterioration.
This uncertainty, along with dissipating support measures going into 2021, poses considerable risks for banks, underpinning Moody’s Investors Service’s negative outlook for global banking systems.
“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,” Moody’s associate managing director Sophia Lee said in a statement today.
“This compares with only 14 per cent at the end of 2019.”
These outlooks 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. Among this group, Italy and India are most exposed to the economic and fiscal consequences of a shock to the financial sector.
On a macro level, banks face risks stemming from a potential resurgence of coronavirus cases with extended disruption, which would lead to lower economic growth and higher loss provisions, said Lee.
Meanwhile, the unwinding of policy support going into 2021 may result in rising credit costs, and the lower-for-longer interest rates will continue to impact banking systems’ profitability.
In addition, increased corporate debt burdens will add to banks’ asset risks, and as supportive measures ease, corporate default rates will rise.
“COVID-19 is accelerating digitalisation in banks as more activity moves online, but it also means banks are now exposed to a greater risk of cyberattacks and face more competition from fintech,” she said.
On the Environmental, Social and Corporate Governance (ESG) front, as more governments set targets for carbon neutrality, this will raise the likelihood of bank-specific measures, including ESG disclosures and stress-testing requirements.
Moody’s outlook for the global banking sector reflects its expectations for fundamental business conditions for this sector over the next 12-18 months and does not reflect its outlook for individual issuers.