Moody's Ratings has raised its forecast for global banking in 2025, indicating increased confidence in the sector's stability and resilience.
Economic growth and easing measures drive Moody’s 2025 banking outlook upgrade.
Asset quality stable in Asia Pacific, with risks in China and Hong Kong.
Profitability faces pressure from lower NIMs, but liquidity remains strong.
Moody’s Ratings has revised its global banking outlook for 2025 from negative to stable, citing stabilising economic growth and monetary easing as key factors supporting banks' operating environments. While economic conditions are expected to improve, risks remain from geopolitical tensions, trade uncertainties and policy shifts in the US post-election.
Economic stabilisation is likely to benefit Asia Pacific's banking sector though challenges persist. While credit demand is driven by low interest rates, loan growth may be modest in some markets such as Hong Kong and Thailand due to macroeconomic concerns. Trade-dependent economies, including Australia, Korea and Mongolia remain vulnerable to China’s slow recovery and broader geopolitical pressures.
Asset quality and capital resilience
Banks in the region are expected to maintain stable asset quality, as lower interest rates improve borrowers' repayment capacity. Non-performing loan (NPL) ratios in India and the Philippines may normalise from historically low levels, while real estate-related risks persist in mainland China and Hong Kong. Although risks from local government financing vehicles have declined, Chinese banks remain vulnerable due to significant exposure to these entities. However, strong loan-loss reserves, should cushion against potential defaults.
Capital levels and profitability outlook
Bank profitability is expected to decline across the region, but capital levels should remain stable due to retained earnings and conservative dividend policies. The final adoption of Basel III rules is unlikely to have a major impact, except in Japan and New Zealand, where stricter capital regulations could reduce common equity tier 1 (CET1) ratios.
Lower interest rates will continue to compress net interest margins (NIMs) particularly in high credit-growth economies, such as Indonesia and the Philippines. Strong competition among Chinese banks limits the ability to raise deposit costs, keeping profitability constrained. Meanwhile, Japanese banks could benefit from rising domestic interest rates by reallocating cash into government bonds for improved interest income.
Liquidity outlook and banking sector resilience
Asia Pacific banks will remain liquid, with solid bases in deposits and stable wholesale funding needs. Regulators are likely to further strengthen the liquidity management requirements, as seen in recent policy changes in India and Australia. Most governments in the region will continue to give significant support to systemically important banks, while smaller banks in fragmented markets, such as Bangladesh and Vietnam, may receive only moderate support.
Stability amid uncertainty
Despite ongoing geopolitical uncertainty and potential shifts in global trade dynamics, Moody’s expects banks in most regions to remain resilient in 2025. The stable outlook is underpinned by stabilising economic growth, improved credit conditions and strong regulatory frameworks, ensuring that banks are well-prepared to withstand the evolving challenges.