Newsroom
In an insightful conversation with Kathimerini's Panayiotis Rougalas, Nick Hill discusses the key macroeconomic risks and opportunities facing the region in 2025, the evolving landscape of digital transformation in financial institutions, and the challenges surrounding non-performing loans. Hill also explores the influence of geopolitical tensions, including the Russia-Ukraine conflict, on financial institutions' ratings, and shares Moody’s approach to integrating environmental, social, and governance (ESG) factors into its ratings process. With a keen focus on both opportunities and risks, Hill provides valuable perspectives on the future outlook for financial institutions in the region.
Q: What are the key macroeconomic risks and opportunities you see for the region in the next year?
A: We expect most G-20 economies will experience steady growth and continue to benefit from policy easing and supportive commodity prices. We expect a slow cyclical improvement in Europe in 2025 and 2026 as looser financial conditions promote household spending and investment. We forecast real GDP will grow 0.7% in 2024 before it strengthens to 1.2% in 2025 and 1.5% in 2026. Risks to the outlook are tilted to the downside. The German economy has especially struggled to gain momentum and has stagnated near pre-pandemic levels. While not as bleak as Germany, growth momentum in France and Italy remains unremarkable. In light of this subdued outlook, the ECB is likely to step up the pace of its easing with a 50 bp rate cut in December, followed by 25 bp cuts at the next few meetings. At this pace, its rate cuts would end by April 2025 as policy normalization is achieved, provided the economy doesn’t deteriorate before then. In fact, we could see the ECB going into an aggressive easing mode if the economic outlook further deteriorates
Q: How do you evaluate the risks and benefits associated with digital transformation initiatives in financial institutions?
A: Digital transformation in financial institutions presents a blend of significant benefits and inherent risks. On the positive side, leveraging advanced technologies like AI and automation enhances efficiency, enabling faster processing of financial data and deeper analytical insights. Tools such as large language models streamline operations by automating routine tasks and extracting actionable information from vast datasets, driving productivity and cost savings. Moreover, digital transformation enhances risk management by enabling granular assessments at the asset level, helping institutions better identify and address localized or systemic vulnerabilities.
However, these initiatives are not without challenges. They require robust cybersecurity measures to mitigate threats, significant investments in infrastructure, and navigating regulatory uncertainties. Successful implementation depends on balancing these risks with the strategic deployment of technologies that yield tangible, scalable benefits.
Q: What trends in non-performing loans (NPLs) or loan-loss provisions are most concerning in the current economic environment?
A: We are not overly concerned about trends in asset quality overall and our expectation is for a moderate deterioration in 2024. According to latest EBA data, the NPL ratio of EU banks stood at 1.9% at end of June 2024 broadly unchanged from a year earlier and we don’t expect a material deviation from this trend in the second half of the year.
We continue to see pockets of risks, though, in some segments of the market like SMEs -- where the NPL rose to 4.6% at end of June 2024 from 4.3% a year earlier – and in Commercial Real Estate (CRE) – the ratio increased to 4.4% from 3.9% during the same period. Specifically, we think that pressure on CRE loan quality will likely remain elevated, even if conditions for the sector will modestly improve as lending standards ease, policy rates decline and economic growth recovers. A sizeable cluster of debt approaches maturity in 2025 and 2026 and the rollover of this debt will result in a significant increase in debt servicing costs. Our stress test shows, however, that banks' capitalization can absorb a significant deterioration in the quality of these loans.
Q: How have recent geopolitical events, such as the Russia-Ukraine war or tensions in the Middle East, influenced your ratings for financial institutions in the region?
A: Increased trade tensions and geopolitical stresses are primary risks to the macro-outlook for 2025. The inclusion of North Korean soldiers by Russia in Ukraine, rising tensions in the South China Sea and the Taiwan Strait and expanding conflicts in the Middle East contribute to a tense international backdrop. Competition between the US and China will shape policies, potentially raise global trade barriers and trigger trade or currency wars. This long-term geoeconomic fragmentation could further split the global economy into geopolitical blocs, complicating global trade and financial connectedness, further dampening global growth.
The chief credit impact on our rated issuers has been in Israel, where we have already downgraded banks’ ratings twice this year following successive downgrades of the sovereign ratings to Baa1 with negative outlook, from A1. Even so, the intrinsic creditworthiness of banks has remained stable since October 2023, as banks have shored up their risk absorption buffers, whether through capital or loan loss provisions, and their profitability has increased thanks to higher interest rates, past efficiency gains and relatively stable asset quality.
Q: How do you integrate environmental, social, and governance (ESG) factors into your ratings for financial institutions, and what challenges do you face in quantifying these risks?
We think about Environmental, Social and Governance risks in assigning all of our ratings. For banks, these considerations drove about 15% of our rating actions last year, the most factor being governance weaknesses.
