Moody's: Global banking outlook 2016; banks' financial strength to improve but pressures persist

While banks in many countries have improved their capitalization and strengthened their balance sheets, risks -- including weakening asset quality in emerging markets -- could derail progress, according to Moody's Investors Service in its just-published report "Global Banking 2016 Outlook: Macro Challenges, Regulation Will Offset Improved Fundamentals."

"The prospects for banks in 2016 will continue to center around global growth and interest rates, the evolving regulatory environment and generally weak profitability, as well as regional considerations such as the implementation of the Banking Union in Europe," said Moody's Global Managing Director Greg Bauer.

Moody's expects to see European banks continue reducing the overhang of bad loans. At US banks, net charge-offs and early-stage delinquencies are expected to remain low for most asset classes. However, despite these improving credit trends, the stable outlook for banks globally could be threatened if economic growth falls short of projections or turns negative.

The outlook anticipated no more than moderate asset quality deterioration in some Asian banking systems. However, Moody's said that further deterioration -- in the region and in other emerging markets -- could occur if trade flows and/or commodity prices fall further than expected, or if rising interest rates undermine the ability of households and corporates to meet their debt obligations.

On the regulatory front, Moody's expects that solvency and balance sheet liquidity will continue to improve as banks move closer to full compliance with requirements under the Basel III framework. However, various jurisdictions are at different stages of Basel III implementation, and there are some national deviations from the framework, generating complexity and associated uncertainty. The challenges are greatest for global systematically important banks which operate across numerous jurisdictions.

Moody's 2016 outlook notes that the global investment banks will continue to be affected by all of the above issues given their interconnectedness with the global banking system. Moody's Global Managing Director Frederic Drevon said, "Depressed revenues and margins, combined with regulatory requirements aimed at strengthening global investment banks' solvency, will leave cost-cutting and further restructuring as the only remaining levers available for banks' management to enhance returns."