The outlook for global investment banks (GIBs) is stable for 2016, as strengthened capital and liquidity -- driven by regulatory reforms -- will continue to bolster banks' credit quality, said Moody's Investors Service. However, the challenging operating environment, elevated conduct and restructuring costs and revenue headwinds will continue to pressure banks' profitability. 

Moody's said the GIBs asset quality will remain strong, but could see some deterioration -- particularly in the areas of leveraged lending, energy & commodities and emerging markets. 

While an expected increase in US interest rates will alleviate some margin pressure and provide slight improvements in revenue from the banks' fixed-income, commodities and currency trading businesses, Moody's analysts said banks' struggle to generate satisfactory earnings will continue. 

"The global banking regulatory changes since 2008 have driven US and European investment banks to strengthen their capital, liquidity and leverage profiles, but most are still struggling to earn their cost of capital as they face tepid global growth and increased compliance costs," said Moody's Managing Director Robert Young. 

The challenging operating environment for the GIBs' capital markets franchises will lead to further emphasis on investing in technology and pursuing less capital- and people-intensive business models. Moody's said the banks' focus on improving efficiency will continue driving efforts to alter business mix by reducing geographic footprint, exiting high-capital intensity businesses and running off legacy portfolios. 

"Revenue headwinds and ongoing regulatory pressures have left global investment banks with limited options," said Young. "For management, business restructuring and expense reduction are the key remaining levers to drive improved returns." 

Moody's said the GIBs will continue to grapple with ongoing probes and litigation regarding legacy conduct and market practices; however, their litigation risks, albeit presenting ongoing drains on profitability, will remain manageable. Since 2008, the banks have recorded around USD219 billion in litigation provisions -- two-thirds of which are attributed to the US GIBs, who had higher exposures to US mortgages and started to provision for related litigation earlier than their European peers.