Banks face negative outlook in 2024 amidst bad loans, higher costs

ASEAN banks, however, will benefit from policy changes arising from geopolitical tensions.

A tough year is on the horizon for banks, as reduced repayment capacity and higher costs are expected to weigh on loan quality and profit gains.

Moody’s Investors Service has given global banks a “negative” outlook of 2024, citing central banks’ tighter monetary policies that have resulted in lower GDP growth.

“Reduced liquidity and strained repayment capacity will squeeze loan quality, leading to greater asset risks. Profitability gains will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will be more difficult,” the credit ratings agency wrote in its latest outlook report.

Expect to see below-trend economic growth and high interest rates for the next twelve months even as major central banks begin to cut rates. 

ASEAN to benefit from geopolitics
Geopolitical tensions between China and the US and EU, meanwhile, are reshaping industrial industrial policies and fomenting supply-chain diversification.

Countries in the Association of Southeast Asian Nations (ASEAN), as well as India, are expected to benefit from this, Moody’s said.

As an example, Mexico has already benefited from the changes, which led to faster GDP growth for the country thanks to nearshoring.

APAC outlook “stable”
Pockets of resilient GDP growth, mainly in emerging markets, will better sustain bank operations, Moody’s noted.

In Asia, India and Indonesias have been singled out as likely facing economic growth thanks to their strong domestic-focused economies that do not heavily rely on international trade. This will help maintain their high GDP growth, with India’s economy sighted to expand 6.1% in 2024, and Indonesia’s to expand 5% over the same period.

Real estate remains a problem for some APAC markets. Notably, exposure to real estate and related sectors, such as construction, remains a key risk for banks in mainland China, Hong Kong, South Korea, and Vietnam.

Despite this, funding and liquidity will remain stable for banks in the region, as they remain well-funded by deposits and do not rely heavily on wholesale sources. 

“They will also continue to have more than sufficient liquidity to meet debt and deposit obligations, partly because of adherence to prudential regulations for net stable funding ratio and liquidity coverage ratio,” Moody’s said.

China in doldrums; opportunities for India, Japan
Amongst Asia Pacific markets, China is especially vulnerable in 2024, seeing slowing economic growth and continued issues from its property downturn. The net interest margins (NIMs) of Chinese banks will contract further on loan repricing after the central bank's policy easing and the flow of funds to more expensive time deposits.

“Chinese banks face risks from slower economic growth and second-order impact from a prolonged property downturn,” Moody’s warned, adding that asset risks for Chinese banks will increase from the country's economic slowdown as well as the prolonged stress among property developers and local government financing vehicles.

Indian and Japanese banks, meanwhile, could see their NIMs grow.

Indian banks' profitability will increase further on lower provisioning expenses and robust growth in higher-yielding retail segments,” Moody’s wrote.

Japanese banks could also benefit from a NIM upside as the central bank looks to move from its ultra loose monetary policy amid elevated inflation and potential wage hikes.

Elevated rates, tightening underwriting standards
Lower economic expansion will limit business prospects, resulting in slight to moderate loan growth, which will curb higher rates' benefits to banks. Instead, elevated rates for the most part will lead to higher funding costs and greater asset risks among existing borrowers, Moody’s warned. 

In the US and Europe, tightening underwriting standards– a response to rising asset risks can lead to credit contraction– will in turn reduce growth. 

Operating conditions for banks in various emerging markets, however, will benefit from an earlier easing or steady monetary policies and higher or resilient GDP growth.