Moody’s predicts a “hook-shaped” recovery path for banks, “characterized by an upward tilt that lies somewhere in between a U- and an L-shaped economic recovery, implying a painful journey. “
In a new report, Are Banks on the Road to Recovery?, Moody’s does not comment directly on the strong results reported by Goldman Sachs (GS) and JPMorgan Chase (GS), but does note that the recovery will result in winners and losers.
Generally, we would say that financial fundamentals are still on the downward slope, mainly because of the delay that exists between the end of a recession and actual charge-offs, and that macro-economic conditions are nearing the bottom. However, we consider most firms’ ratings as having already hit –or are remaining – at the lowest point of the hook.
Although we do foresee some variations, common risks and trends that underpin our overall assessment are the following:
- Recent signs of recovery are largely due to government support and the return of investors’ confidence and risk-taking.
- The losses that we expect financial firms to incur over the coming quarters are high, keeping financial fundamentals weak, and their ability to generate sufficient earnings to offset credit losses and maintain investors’ confidence remains a key question.
- A crucial challenge will be the transition to a world where government systemic support is withdrawn and replaced by tighter regulation. The main pitfall associated with this transition will be rolling over significant sums of maturing debt at reasonable cost. As discussed here, the withdrawal of support is expected to be particularly stressful for banks, which benefit systemically and individually from this support in proportionally greater number than other types of financial institutions.
- Higher credit and funding costs will lead to lower earnings, which may in turn force a re-pricing of credit risks and, by extension, a contraction of liquidity
