Banking Outlook Is Improving, Moody’s Says, but Deregulation Is a Risk

The latest quarter of results from JPMorgan Chase and other large U.S. banks showed solid or improving consumer and commercial credit. (ANGELA WEISS/AFP/Getty Images)

Moody’s Ratings now has a rosier outlook on the U.S. banking system over the next 12 to 18 months because the firm expects a mix of lower interest rates and “muted but stable” economic growth to help lenders’ profitability and asset quality.

The ratings firm lifted its outlook for the economically sensitive sector to stable from negative while noting it expects real gross domestic product growth in the U.S. to slow to 1.8% in 2026 from 2% this year.

“The stable outlook also incorporates an expectation that a modest pickup in loan growth and a steepening yield curve will enhance net interest income, most banks’ primary revenue source,” Moody’s said Thursday, adding banks’ funding and liquidity levels will remain stable.

For Moody’s, a shift in outlook is different from a change in credit rating. The latest quarter of earnings from large banks, including JPMorgan Chase , Wells Fargo and Bank of America , showed solid or improving consumer and commercial credit, with generally upbeat comments from executives on the economy.

At the same time, Moody’s said that expectations of a lighter touch from financial regulators adds some risk to the banking sector.

“The prospect of a loosening of bank regulation and supervision adds some incremental risk for bank creditors,” Moody’s wrote. “Greater clarity on bank capital rules and stress testing will likely lead to lower capital ratios at the largest banks.”

Federal watchdogs under the Trump administration are in the process of dialing back banking safeguards that have been labeled as too onerous and expensive by lenders.

Regulators are considering changes, in particular, to the way they stress-test big banks and to how they decide banks’ capital levels to cushion against potential losses. Altogether, their changes could lead to lower capital requirements for some banks, Moody’s noted.

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com