Moody’s Upgrades US Banking Outlook to Stable as Economy Improves
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Credit ratings agency Moody’s on Tuesday raised the U.S. banking sector outlook from negative to stable, a move that reflects continued improvement in the operating environment and reduced downside risks to banks from a faltering economy.
Moody’s is becoming more optimistic about U.S. lenders a year after it downgraded 15 banks in a review of the global financial system.
Credit ratings agency Moody’s on Tuesday raised the U.S. banking sector outlook from negative to stable, a move that reflects continued improvement in the operating environment and reduced downside risks to banks from a faltering economy.
Moody’s is becoming more optimistic about U.S. lenders a year after it downgraded 15 banks in a review of the global financial system.
Citing improved employment conditions and sustained GDP growth, the credit ratings firm said lenders are less exposed to potential losses while low interest rates have buoyed the values of their real-estate portfolios.
“Sustained GDP growth and improving employment conditions will help banks protect their now-stronger balance sheets,” said Sean Jones, a Moody’s associate managing director, in a statement.
“In addition, after another year of reducing credit-related costs and restoring capital, U.S. banks are now even better-positioned to face any future economic downturn.”
Related: Most US Banks Able to Weather Deep Recession
Moody’s projects U.S. GDP growth to be in the range of 1.5 to 2.5 percent in 2013 – 2014, accompanied by a continuing decline in unemployment towards 7 percent. The unemployment rate stood at 7.5 percent in the most recent monthly U.S. jobs report.
According to the firm, the low-interest rate environment would be the “single most important issue” that drive U.S. banks’ performance in the next 12-18 months, adding that low rates of 0 percent to 0.25 percent have helped to promote private-sector employment to the extent that it “more than offset” job losses in the public sector.
In addition, low interest rates have supported recent improvements in the banks’ assets quality metrics, with net charge-offs now approaching pre-crisis levels.
However, Moody’s also warned that such low interest rates harm U.S. banks’ pre-provision earnings in both the near- and medium-term. Most immediately, low rates reduce a key source of profitability – banks’ net interest margins.
In addition, low rates encourage looser loan underwriting standards as banks seek out higher return and riskier assets which could result in greater credit costs, reducing pre-provision earnings, in the future.
According to Moody’s, the firm does not see a further upgrade of the sector to “positive” any time within the next 12 months, but warned that a reversion to a negative outlook is possible if banks slacked off in its underwriting standards.
Related: Central Banks Saved World Economy But Beware the Exit: IMF
