Moody’s Ratings changed the banks’ global outlook to stable from negative.
The rating agency’s move reflected its expectation that stabilization of economic growth and monetary easing will benefit banks’ operating environment, ease pressure on asset quality and help restore deposit growth.
However, he noted that geopolitical conflicts, trade tensions and policy changes following the US elections will generate significant uncertainty and risks.
Moody’s detailed in a report that interest rate cuts and economic growth will help improve the debt payment capacity of borrowers in the main banking systems, which will support the quality of their portfolios.
The rating agency expected the non-performing portfolio to increase slightly due to the delayed impact of high rates and stress on some commercial real estate companies, but “remaining relatively low.”
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He detailed that Latin American banks will be the ones that will benefit the most from the moderation of inflation and additional rate cuts, after a cleanup of loan portfolios and efforts to control the new formation of the non-performing portfolio.
It said asset quality in most North American and Asia Pacific banking systems will remain largely stable, with modest increases in non-performing loans from cyclical low levels.
However, it highlighted that the asset quality of banks in Western Europe will deteriorate slightly due to the weakening of portfolio quality in small and medium-sized enterprises (SMEs) and the commercial real estate sector.
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“Banks in many systems have built up significant reserves for credit losses in recent years, while bad debt portfolios remain low, which will provide them with protection against future credit losses,” he explained in the report “Outlook 2025: upgrade to stable.” , thanks to the stabilization of economic growth”,
“For example, banks in China had reserves for credit losses that represented 209% of their non-performing portfolio at the end of June 2024, and in the US banking system this percentage was 194%,” the rating agency added.
New administration in the US and the Fed
Furthermore, Moody’s anticipated that most of the main central banks will make monetary policy more flexible and thereby reduce inflationary pressure, which will favor economic growth and credit conditions.
On the other hand, he highlighted that with the arrival of a new administration in the United States, the effect of the policies of the new US government is expected to slightly impact economic activity, although otherwise changes in fiscal policies are not taken into account. immigration or commercial until they are implemented.
The Federal Reserve System’s rate cuts will give other central banks more room to adjust their policies based on domestic economic conditions.
With inflation slowing in the US, the Federal Reserve reduced the federal funds rate by a total of 75 basis points (bp) in September and November to between 4.50 and 4.75%.
He noted that the risk of the new US government adopting potentially inflationary measures complicates the prospect of monetary easing, and estimated that the central bank will reduce its interest rate to 3.50 to 3.75% in mid-2025 and pause to evaluate conditions. economic and financial.
“We expect the federal funds rate to eventually normalize in a range of 3 to 3.5 percent, but there is great uncertainty around the equilibrium level of the interest rate,” he concluded.
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