U.S. banks may be putting the effects of the financial crisis behind them, but they remain vulnerable to an economic slowdown.
Low interest rates, high unemployment, lackluster growth and uncertainty over fiscal policy combine to make the environment uncertain for banks, according to a comment published Thursday by Moody's Investors Service.
Though banks' balance sheets stand to improve further if the recovery continues at its current pace, the ratings agency expects banks to face profit pressures because of interest rates, which the Federal Reserve is expected to keep low through mid-2015.
"In 2013, with rates remaining low, we think banks have less room to help offset that pressure," Joseph Pucella, a Moody's senior banking analyst, told American Banker. "The mortgage banking revenue may come down, the benefit from lower loan loss provisions is going to go away, but the margin pressure on the asset side is going to continue."
"Banks have been cutting costs throughout 2012; the levers are diminishing in terms of what they can do to help offset the margin pressure," Pucella added.
According to Moody's, profit pressures are pushing banks to relax standards for loans that were tightened following the financial crisis and to seek out riskier investments in pursuit of yields.
Though the makeup of troubled loans that remain on banks' books suggests banks have reached the latter stages of the financial crisis, the pool of problem loans remains "stubbornly high," despite a decline since 2009 in delinquencies and nonperforming loans, according to the ratings agency.
A falloff in the economy that fuels unemployment or lowers real estate values "would cause an immediate deterioration in U.S. banks' asset quality" and undercut recent improvements, Moody's wrote.
According to Moody's, the capital ratios of U.S. banks are high compared with global peers as a result of both infusions from the Treasury at the height of the crisis and profits that banks have generated since 2011.