Banks will report solid profits in 2023. Rising interest margins will enable continued capital generation on top of already strong capital, while liquidity and funding will remain robust, even as gloomy economic conditions across much of the world cause loan performance to deteriorate. Bank creditworthiness will remain broadly stable.

Banks face a weak and more volatile macroeconomic environment

We expect economic growth to slow across the globe in 2023. High inflation, geopolitical shifts and financial market volatility are hurting households and businesses and there is a substantial risk of further shocks ahead. Positively, unemployment, a key leading indicator of credit risk for households, will remain below the 20-year average in most G-20 countries.

Loan performance will deteriorate moderately from strong levels

Loan quality will deteriorate from high levels as Covid measures expire, economic growth weakens, the uncertain outlook undermines confidence, and rising interest rates challenge debt affordability. Loan losses will be kept contained by stricter underwriting standards over the last 10 years, reduced exposure to riskier asset classes and strong loan-loss provisioning. Problem loan formation will likely be greater in highly dollarised emerging markets, while many banks in energy-producing countries will benefit from higher oil prices.

Rising interest rates and solid reserves will shield banks from increasing delinquencies

Despite difficult operating conditions, banks will report solid profits in 2023. Higher net interest income and strong reserves booked during the pandemic will offset a moderate, inflation-induced increase in operating costs and weakening loan book quality. Banks in North America, the Middle East, some Western European countries and Asia Pacific (excluding China) will benefit most from higher rates.

Capital will remain sound

Capital ratios will remain broadly stable across regions, as solid profitability allows banks to generate capital internally and as regulatory requirements remain high. Profit retention will outpace rising risk-weighted assets and shareholder distributions.

Funding and liquidity will remain strong

Deposits will likely remain well above pre-pandemic levels for at least the next 12 to 18 months, and bail-in debt requirements have now been largely met in most advanced economies. This and a strong starting point mean that banks will remain well funded throughout 2023 even while central banks continue to drain liquidity through quantitative tightening.