Banks improve to stable, underpinned by stabilizing economic growth

Executive Summary

We have changed the global outlook for banks to stable from negative, reflecting our expectation that stabilization 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 will create significant uncertainty and risks.

» Stabilizing economic growth and monetary easing will support stable operating environments. We expect most G-20 economies to move from cyclical recovery to slower but sustainable rates of growth in 2025 amid monetary easing. However, geopolitical conflicts and post-election policy changes in the US will pose risks.

» Interest rate cuts and economic growth will support asset quality. Lower rates, coupled with economic growth, will help improve borrowers’ debt repayment capacity in major systems, supporting loan quality and keeping nonperforming loan (NPL) ratios relatively low. Yet exposures to commercial real estate (CRE) will continue to weigh on banks’ asset quality in the US (Aaa negative), Europe and some Asia-Pacific systems.

» Capital will be stable despite the implementation of tougher final Basel III requirements. We expect banks to keep their capital ratios stable because large banks can phase in the new Basel III standards over long periods and already have sufficient headroom above minimum capital requirements.

» Narrowing margins amid rate cuts will strain banks' profitability. Banks' profitability will weaken in most systems as net interest margins (NIMs) decline after rate cuts. Pressure on NIMs will be greater in systems where competition is intense, banks are heavily reliant on deposits for funding or large proportions of loans carry floating rates.

» Funding and liquidity will remain robust in most systems. Deposit growth will continue to recover in 2025, though moderately, because rate cuts will erode returns on investment products and make deposits more attractive.

» Governments’ willingness to provide support will remain unchanged. However, a weakening of fiscal capacity will somewhat constrain governments' abilities to provide support for banks in some systems.