Banks – Global2018 OutlookDecember 06, 2017OUTLOOK RESEARCH Banks – Global 2018 Outlook, December 20172ContactsGregory W. BauerMD – Global Bankinggregory.bauer@moodys.com+1.212.553.1498Celina Vansetti-HutchinsMD – North America and Latin America Banking celina.vansetti-hutchins@moodys.com+1.212.553.4845Frederic DrevonMD – Global Bankingfrederic.drevon@moodys.com+44.207.772.5356Stephen Long MD – Global Bankingstephen.long@moodys.com+852.3758.1306CarolaSchulerMD – EMEA Banking carola.schuler@moodys.com+49.697.073.0766Sean MarionMD – EMEA Financial Institutions sean.marion@moodys.com+44.207.772.1056This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see theratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.Nick Hill MD – EMEA Bankingnick.hill@moodys.com+33.153.301.029Graeme KnowdMD – Asia Pacific Bankinggraeme.knowd@moodys.comPhone +81.354.084.149 Ana ArsovMD – Global Investment Banks ana.arsov@moodys.com+1.212.553.3763RobardWilliamsSVP – CS&Rrobard.williams@moodys.com+1.212.553.0592Jennifer ZongAssociate Analyst – CS&Rjennifer.zong@moodys.com+1.212.553.0110 Banks – Global 2018 Outlook, December 20173Table of ContentsOverviewBank Ratings and Outlooks1.Macro Outlook & Financial Fundamentals2.Regulatory Landscape3.Fintech& Technology4.European Union5.North America6.Emerging MarketsAppendix Page 04 Page 07Page 11Page 17Page 21Page 24Page 28Page 31Page 35 Banks – Global 2018 Outlook, December 20174OverviewSynchronous upturn in global growth to underpin stable creditworthiness across banking systems»Strengthening economic growth and improved solvency underpin bank creditworthiness:The global banking sector will benefit from favorable credit conditions that include improving economic growth and a supportive funding environment, following improvements in capitalization achieved over the past few years.»But low returns will persist:However, broadly stronger economic growth is unlikely to translate into material improvements in bank profitability in the coming year. Banks’ returns on assets and capital remain relatively modest given low interest rates and, in some jurisdictions, stubbornly high levels of nonperforming loans, each of which will continue to weigh on asset returns.»Accommodative borrowing conditions have also driven up private sector indebtedness and asset prices, presenting downside risks:We see the main downside risks as being relatively high levels of private sector indebtedness and, in some markets, elevated asset prices – for example, housing and equities. While we expect broad-based economic growth to support borrowers’ repayment capacity, pockets of high borrower leverage have been manifest in some credit deterioration – for example, in US banks’ credit card and auto loan portfolios. Equally, we see conditions across global financial markets remaining favorable in the coming year, event-related volatility notwithstanding. Banks – Global 2018 Outlook, December 20175OverviewAs low rates weigh on returns, pressures on banks’ cost base will also persist»Costs related to regulatory compliance and investments in technology will keep operating expenses high:While there remain some facets of the Basel capital and liquidity framework to be fully phased in or, in some jurisdictions, initiated, we do not expect material increases in capitalization in the aggregate. In addition, the introduction and application of IFRS 9 will have some negative impact on banks’ reported capital ratios. And, as has been the case for some time, meeting regulatory and supervisory requirements will entail elevated costs, particularly as banks adjust to new governance structures and reporting regimes. »Similarly, there will be an ongoing imperative for banks to develop, implement and maintain technology upgrades to boost customer acquisition and retention and improve efficiency:Our expectation remains that incumbent institutions will maintain their position at the core of consumer and corporate banking services for the foreseeable future. However, new and nontraditional firms have already begun to establish material positions in providing certain financial services – for example, Chinese ecommerce giant Alibaba, which has developed sizeable payments, credit provision and deposit businesses – highlighting the importance for incumbents of meeting customer expectations around quality of service and pricing. At the same time, such changes in the competitive landscape may limit the extent to which investments in technology and associated efficiency gains translate into improvements in the bottom line. Banks – Global 2018 Outlook, December 20176Overview»Profitability drag from low rates will be particularly acute for banks in the EU even as growth turns positive across the region: We expectan exitfromnegative interestratesbyend 2018 at theearliest, withcontinuedultra-lowinterestrates