A report by Moody’s brings little end-of-year cheer to finance professionals, with tight monetary policies and souring loans significantly impacting the sector’s growth, earnings, and funding costs in 2024.

The impromptu interest rate bonanza triggered by a flurry of central bank rate hikes has reached a watershed moment. If banks aren’t pumping out very significant revenues from long dried-up pipelines of interest income by now, that could very well be it. At least when it comes to the current cycle.

That is because things seem to be about as negative as they can get for next year, according to Moody’s, which released its outlook (registration required) for global banks on Monday.

There was not much the hapless average international banker could take from it that would provide much in the way of comfort. Moreover, it is also starting to make the Swiss government’s prodding of UBS to rescue Credit Suisse in March look prescient.

Everything Pointing Down

The rating agency believes tight central bank monetary policy will cut GDP growth worldwide, with loan quality worsening on «reduced» liquidity and «strained» repayment capacity. «Profitability gains will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will be more difficult,» it indicated.

In short, if you work at a sizeable international bank – take cover. Even so, the situation is not completely dire, with the negativity somewhat offset by stable capitalization rates as banks continue to generate capital internally.

Although Moody’s expects central banks to start cutting rates in 2024, the level of money in economies worldwide will remain tight even with the pace of inflation slowing, and that will cut into GDP growth. China will continue to experience slow growth given limited spending, weak exports, and continued trouble in the property market. Then there are the pesky details of simmering geopolitical and climate risks, which continue to linger in the background.

As Good as It Gets

It all boils down to the fact that right now, things are about as good as they are going to get, and banks should be making a great deal more profit now than they did two years ago. If not, watch out.

Moody’s sees higher funding costs cutting into net interest margins and weak loan growth as the high level of interest rates is limiting appetites for loans while credit standards are being ratcheted up.

Provisioning expenses are going to go up, something a Julius Baer can soundly attest to given its recent hiccup in Switzerland that was ostensibly related to Austrian entrepreneur and investor René Benko.

Tight Budgets

In all this, banks are going to have to keep spending internally whether they want to or not.

Tech-related investment has become a non-negotiable, and there has never been a regulatory cost that has come in under budget. In fact, without trying to put too many words into the rating agency’s mouth, you could even interpret those two factors as a decade-long secular trend that points in exactly one direction – up.

Regional Outlook

There are some bright spots, particularly in the Asia Pacific region. India is expected to see GDP growth of 6.1 percent in 2024, with Indonesia increasing a very solid 5 percent.

In the Middle East, banks will continue to benefit from high oil prices and state-driven efforts to wean local economies off their dependence on fossil fuels.

Geopolitical tensions between China, the US, and the EU could even end up benefiting countries in the ASEAN given the move underway to reshape industrial policies and diversify supply chains away from the world’s second-largest economy.

Debt Risks

But there are also pitfalls close to home for banks. The high rate of household debt worldwide exposes banks to asset risks given the current inflationary environment, with interest rates limiting the ability of many to repay.

That is particularly true for South Korea, where debt has risen significantly in the past five years and currently ranks among the highest globally.

China is no poster child in that regard either, something that became acutely clear during the property crisis. Its increase in debt in recent years has driven it to levels that are comparable to that seen in more traditionally industrialized countries. Moody’s, however, maintains that it sees limited increases in problematic lending in China given proactive risk management by the banking sector.

Vulnerable Property Markets

That brings us to the property markets, which will continue to hamper developments in many parts of the Asia Pacific.

Moody’s believes that many markets have shown resilience, although China, South Korea, and Vietnam continued to deteriorate and «remain vulnerable».

In Hong Kong, banks, particularly smaller ones, are showing the effects of being exposed to property developers in Mainland China by way of the latter’s offshore exposures while in Australia and South Korea, high rates of household debt coupled with high interest rates are «exacerbating» risks.

A Question of Climate

Moody’s indicated that global banks continue to review risks in their portfolio related to climate in a fashion that is in line with relevant sovereign carbon transition goals, with related exposures rising at the largest among them in the past three years.

Despite that, they do not indicate with any granularity about how climate change will affect financial performance, with the pace varying between regions. 

Still, banks in Asia Pacific seem to be the most advanced – by far – in that respect. According to the rating agency, 55 percent of banks in the region have endorsed the TCFD voluntary framework on climate disclosures, with second-placed Europe lagging at 29 percent.

Getting Rid of Banks

Global banks will continue to face widespread calls, usually from very self-interested entrepreneurs, mainly in fintech, to do away with them entirely. In 2024, Moody’s indicates that the possible sources of untimely demise potentially lie in private credit, direct lending, and neobanks. 

Around the world, the rating agency believes that private credit will continue to pose competition for banks, as it is a «highly attractive» source of funding for small and medium-sized companies and one that is expected to continue to grow even though it raises systemic risks.

Tech Goes Both Ways

When it comes to tech, the judgment seems to be a bit more evenhanded as Moody’s is seeing some unlikely improvement from the lumbering behemoths themselves. 

Efficiency has improved in most regions since 2019 and several financial institutions have started using generative AI technologies to improve client experiences and interfaces even though it raises concerns about intellectual property, data privacy, and cybersecurity.

That, in effect, may be the best way to ward off the doomsayers in the longer term – use tech to keep tech at bay.