Moody’s Ratings has revised the global outlook for banks in 2025 to stable, underpinned by stabilising economic growth.

“We have changed the global outlook for banks to stable from negative, reflecting our expectation that stabilisation of economic growth and monetary easing will support operating environments for banks, alleviate pressure on their asset quality and help their deposit growth recover. However, geopolitical conflicts, trade tensions and post-election policy changes in the US create significant uncertainty and risks,” said David Yin, vice president and senior credit officer at Moody’s Ratings.

Asia Pacific excluding China, stable; China, negative

The operating environment will be stable amid economic growth. Economic growth will stabilise across Asia Pacific in 2025, supporting a stable operating environment for banks in the region. Declines in interest rates will provide a boost to credit demand in most systems in the region, although loan growth will remain modest in Hong Kong and Thailand (Baa1 stable) due to macroeconomic uncertainty and in Korea owing to stricter regulatory oversight. However, risks will remain for economies that are reliant on trade, such as Australia, Korea and Mongolia (B2 stable), given China's slow economic recovery and persistent geopolitical tensions.

Economic growth and declines in interest rates will support asset quality. Banks' asset quality will be stable in most systems in Asia Pacific as declines in interest rates will help improve borrowers' debt repayment capacity. In some systems such as India and the Philippines (Baa2 stable), NPL ratios will normalise from cyclically low levels. Risks from real estate loans have decreased in Vietnam (Ba2 stable) and Korea but will remain high in mainland China and Hong Kong. In addition, for Chinese banks, risks from local government financing vehicles have eased but their significant exposures to these entities will continue to strain their asset quality. Loan-loss reserves as a percentage of problem loans will remain high in many parts of the region, and this will help provide buffers against future loan losses.

Capital levels will be stable. We expect banks' organic capital generation to keep pace with their capital consumption. Although banks' profitability will decline, they will preserve capital through reductions in cash dividend payouts and share buybacks. The adoption of final Basel III rules will have a limited impact on Asia Pacific banks as the use of internal models for capital calculation is not very extensive, and previous local regulatory requirements were already strict. Japan and New Zealand (Aaa stable) are exceptions. In Japan, banks' CET1 ratios will decline after the transitional period under final Basel III. CET1 ratios of banks in New Zealand declined substantially in 2022 when the new output floor and the increase in the internal ratings-based scaling factor were implemented. However, banks in the two systems will be able to cope with the impact.

A narrowing of NIMs will strain profitability. Declines in interest rates will pressure NIMs as banks typically reprice loans faster than deposits. The strain on NIMs will be more acute in systems where credit growth rates have been high, such as Indonesia (Baa2 stable) and the Philippines. Chinese banks will face persistent pressure on their profitability because of declines in NIMs, as intense competition makes it difficult for them to lower deposit costs to offset falls in loan yields. Banks have built ample loan-loss reserves, so provisioning expenses will remain low in 2025 for most systems. Japanese banks' profitability will improve, helped by increases in NIMs, as domestic interest rates gradually rise. They will also shift some of their cash holdings to Japanese government bonds, and this will provide a boost to their net interest income.

Funding and liquidity will be stable. Asia Pacific banks have strong deposit bases, and wholesale funding requirements is expected to be stable. Liquidity will remain strong and provide sufficient buffers for banks in times of need. Regulators will continue to enhance banks' ability to manage liquidity risks by tightening regulations. In 2024, the Reserve Bank of India proposed a tightening of rules for calculating banks' liquidity coverage ratios, while the Australian Prudential Regulatory Authority finalised rules to strengthen the resilience of smaller banks to liquidity risks. We expect banks in most systems to maintain robust net stable funding ratios and liquidity coverage ratios in 2025.

Government support will remain strong. Governments in Asia Pacific will remain highly supportive of most rated banks, as they are the largest in the system and are systematically important. Most governments in the region are expected to have ample fiscal capacity to support banks if needed, and central banks can also provide liquidity support. For small and midsize banks in highly fragmented systems such as Bangladesh (B2 negative) and Vietnam, the probability of government support remains moderate. In China, while the government's fiscal capacity to support banks will deteriorate, as reflected in the negative outlook for the sovereign, planned equity capital infusions into six large state-owned banks suggest that the government remains supportive of the banking system.

Moody's Ratings report re-disseminated by The Asian Banker