Credit rating agency Moody’s has upgraded its outlook for the UK banking system to “stable” from “negative”, expecting lenders’ balance sheets to stay resilient to falling interest rates.
Moody’s Ratings said in a report on Wednesday that Britain’s economic growth, falling inflation and lower rates would support banks’ loan quality, although their profitability is set to “ease” from the record highs seen last year.
Moody’s previously downgraded UK banking to “negative” in March, arguing that a “deteriorating operating environment with low economic growth and high borrowing costs” would hit credit growth and loan performance in the largest European countries.
But it said on Wednesday that UK banks could expect “continued stability in asset quality” as “the macroeconomic environment will continue to improve”.
Moody’s said it expected real UK GDP growth of 0.9 per cent in 2024 and 1.2 per cent in 2025, up from 0.1 per cent last year.
It added that inflation should stay “just above” the Bank of England’s two per cent target at 2.5 per cent in 2024 and 2.3 per cent in 2025.
Still, Moody’s flagged the narrowing of banks’ net interest margins – measuring of the gap between interest received on loans and rates paid for deposits – as the BoE is expected to cut interest rates further in the coming months.
Lenders’ profits were boosted by post-financial crisis high borrowing costs last year, which allowed them to charge more on loans.
But in August, policymakers lowered UK interest rates for the first time since March 2020.
This year has seen most major banks report lower earnings, with analysts expecting the trend to continue when big lenders post their third-quarter results later this month.
Moody’s said that despite narrower margins, banks’ “provisioning costs will remain low”.
“The banks’ strong deposit franchises will ensure stable funding, while their capital and liquidity will remain robust,” it added.