This article was originally published on 5 December 2023.
The forecasts for 2024 have been coming in rapidly, and some predictions about stock markets have turned out to be quite inaccurate, especially regarding key measures like the S&P 500.
One forecast that drew attention this week came from Moody’s, which issued a cautionary outlook for the health of the global banking sector in the upcoming year. Moody's cited a "deteriorating" operating environment, increasing bad loans, and the Israel/Gaza conflict as major challenges facing the industry and investors in both stocks and credit products.
Furthermore, anticipated sluggish global economic growth in 2024, rising risks leading to increased borrower defaults, and mounting pressure on profitability and interest margins all contribute to the negative outlook for banks in 2024.
Central banks' interest rate hikes and growing unemployment in advanced economies are expected to weaken asset quality, while real estate exposure in the United States and Europe poses a growing risk. The report also highlights pockets of stress in property markets in the Asia-Pacific region.
Moody’s specifically noted that in Australia and Korea, "high household debt and rising interest rates exacerbate the risk" associated with any issues in property markets. The agency predicts that the largest sources of bad loans will be in Africa, followed by the Middle East.
Among advanced economies, Moody’s warned that higher unemployment and reduced consumer confidence could lead to a sharp rise in "problem loans" in the UK and Canada.
Regarding China, Moody’s commended the country for proactively managing its growing credit problems. For the United States, while loan growth is expected to slow, major loan losses are not anticipated. However, Moody’s, like others, highlighted commercial real estate and the growth of private credit funds as areas to monitor.
Moody’s also cautioned that "the military conflict between Israel and Hamas could yet negatively influence credit conditions through oil prices and market sentiment."
Looking ahead to 2024, Moody's expects tight financial conditions, which could dampen economic growth, even as central banks are expected to consider rate cuts. China's growth is projected to slow due to subdued spending by consumers and businesses, weak exports, and a continuing property market challenge.
Bank profitability is likely to face pressure from high funding costs, reduced loan growth, and the need to accumulate reserves to cover potential defaults, according to Moody's. While profitability gains seen in recent years may diminish, profitability is expected to remain solid. The report suggests that as central banks halt rate hikes and funding costs catch up, net interest margins (NIMs) are likely to remain stable or decrease slightly. However, the report also notes that capital levels, which are crucial for the financial stability of banks, are expected to hold up well.
