Moody’s: Global banks face considerable risks in 2021

ALTHOUGH most banking systems entered the crisis in good shape following a decade of balance sheet strengthening, the recent resurgence in COVID-19 cases highlights the risk 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 pointed out. “This compares with only 14% 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, thus 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, according to the credit rating agency.

“On a macro level, banks face risks stemming from a potential resurgence of COVID-19 cases with extended disruption which would lead to lower economic growth and higher loss provisions,” noted Moody’s.

Meanwhile, the unwinding of policy support going into 2021 may result in rising credit costs while the lower-for-longer interest rates will continue to impact banking systems’ profitability.

In addition, increased corporate debt burden will add to banks’ asset risks and as supportive measures ease, corporate default rates will rise.

On the bright side, the COVID-19 pandemic is accelerating digitalisation in banks as more activity moves online, but this also means banks are now exposed to greater risk of cyberattacks and facing more competition from fintech.

“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,” added Moody’s – Dec 4, 2020

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