While most banking systems faced the crisis well after a decade of strengthening the balance sheet, the recent resurgence of Covid-19 cases underscores the risk of an economic downturn.
This volatile situation, with no supportive measures until 2021, poses a significant risk to banks, supporting Moody’s Investors Service’s negative projections on the global banking system.
"The likelihood of a financial crisis is low but there are still significant risks until 2021, as can be seen from the fact that more than three-quarters of our 70 projected banking system including all G-20 countries except Canada are negative.
"This is compared to only 14% at the end of 2019," Moody's Associate Managing Director Sophia Lee said in a statement today as quoted by Bernama.
These projections broadly reflect the risk that poor operating conditions, particularly in key sectors such as hospitality and retail, will cause lending and profit performance to decline, and potentially reduce confidence in banks, as can be seen in previous crises.
Among these groups, Italy and India are most vulnerable to economic and fiscal impacts from shocks to the financial sector.
According to Lee, at the macro level, banks face risks as a result of the potential recovery of Covid-19 cases with prolonged disruption, leading to low economic growth and higher loss provisions.
Meanwhile, declining policy support until 2021 could lead to rising credit costs, and low long-term interest rates will continue to affect the profitability of the banking system.
In addition, the increasing corporate debt burden will add to the risk of bank assets, and as support measures decrease, the corporate default rate will increase.
"Covid-19 is accelerating the bank's digitization process due to many online switching activities, but this also means that banks are now exposed to a greater risk of cyber attacks and face more competition than fintech," he said.
On the environmental, social and corporate governance (ESG) aspects, as more governments set targets for net zero carbon footprint, this will increase the likelihood of bank-specific measures, including ESG exposure and stress testing requirements.
Moody’s projections for the global banking sector reflect its expectations of the underlying business conditions for the sector over the next 12-18 months and do not reflect its projections on individual issuers.
