Credit agency Moody's upgrades UK banking outlook as lenders adapt to low interest rates

Credit rating agency Moody's has revised its outlook for the UK banking system from "negative" to "stable", predicting that banks' balance sheets will remain robust despite declining interest rates.

In a report released on Wednesday, Moody's Ratings stated that the UK's economic growth, decreasing inflation and lower rates would bolster banks' loan quality, although their profitability is anticipated to "ease" from the record highs witnessed last year, as reported by City AM.

Moody's had previously downgraded UK banking to "negative" in March, contending that a "deteriorating operating environment with low economic growth and high borrowing costs" would impact credit growth and loan performance across the largest European countries.

However, it indicated on Wednesday that UK banks could anticipate "continued stability in asset quality" as "the macroeconomic environment will continue to improve".

Moody's projected real UK GDP growth of 0.9 per cent in 2024 and 1.2 per cent in 2025, an increase from 0.1 per cent last year.

It further noted that inflation is likely to remain "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.

Nevertheless, Moody's highlighted the shrinking of banks' net interest margins the measure of the difference between interest earned on loans and rates paid for deposits as the BoE is predicted to further reduce interest rates in the upcoming months.

Last year, lenders' profits were augmented by post-financial crisis high borrowing costs, which enabled them to levy more on loans.

However, in August, UK interest rates were reduced for the first time since March 2020 by policymakers.

This year has witnessed a majority of major banks reporting decreased earnings, with market analysts predicting this trend to persist as big lenders are set to announce their third-quarter results later this month.

Moody's stated that despite tighter margins, the "provisioning costs will remain low" for banks.