ALTHOUGH most banks can shoulder the impact of corona virus, a second wave leading to new blanket lockdowns or self-imposed changes in consumers’ behaviour, poses a significant threat to global banks, Moody’s Investors Service said in a report today.
Moody’s said, when the Covid-19 pandemic struck early this year and resulted in restrictions on economic activities, the outlook for global banks turned overwhelmingly negative.
Over three-quarters of 70 Moody’s Banking System Outlooks are now negative, compared with the 14% that were negative at the end of 2019.
Despite the bleak outlook, Moody’s noted that most banking systems were in good shape and could withstand the inevitable rise in bad debts over the coming months owing to ten years of broadly benign economic conditions and relentless regulatory pressure to reinforce balance sheets.
This is supported by actions taken by central banks and governments to soften the impact of corona virus which have slowed the rise in asset risk and underpinned liquidity and funding.
Moody’s Investors Service managing director of banking, Nick Hill said, “In contrast to the financial crisis, the banking system is more likely to act as a shock absorber rather than an amplifier.
“But a second wave of the pandemic that leads to new lockdowns and economic turmoil could cause more lasting damage to banks’ credit profiles.”
In a context of profound uncertainties, the ability to preserve and restore capital in the medium term would be a crucial support to banks’ creditworthiness.
The agency revealed, European banks were at an advantage as their starting capitalisation was higher than that of most banks in other regions.
Banks with more diversified business models – notably those with capital markets activities – would prove more robust than those focused on more susceptible activities like lending to small businesses and corporates, it added.
According to the report, challenges would be greatest in areas where profitability was already weak such as Japan and Europe, and where necessary restructuring was consuming pre-provision profits and reducing loss absorption.
Similarly, rapid digitalisation and low-interest rates would further compound the risks facing banks with lower efficiency. – Sept 25, 2020
