Global 2025 FIG outlook
Stability Amid Economic Shifts and Geopolitical Risks
The global financial landscape is poised for a year of stability in 2025, according to the latest Morningstar DBRS Global Financial Institutions Group (FIG) Credit Outlook. While financial institutions are set to benefit from a generally favorable economic environment, the report also highlights emerging downside risks that could impact the sector.
Macroeconomic Outlook: A Transition to Lower Rates
Morningstar DBRS projects a gradual decline in interest rates across major economies, with central banks in Europe and Canada leading the easing cycle. While lower rates are expected to spur economic activity and loan demand, their impact on financial institutions' net interest income (NII) will vary. The U.S. economy is forecasted to grow at 2.0% year over year, whereas the Eurozone’s key economies, including France, Italy, and Germany, are expected to experience more subdued growth rates between 0.6% and 0.8%.
Financial Institutions: Stability with Sectoral Variations
The financial sector’s overall credit outlook remains stable, supported by moderate economic growth and resilient fundamentals. However, sectoral variations persist:
Banking Sector: While net interest margins (NIMs) in Europe are set to decline, U.S. and Canadian banks could see some improvement due to declining deposit costs. European banks, despite lower earnings than in 2024, are expected to maintain strong fundamentals, benefiting from improved loan demand and stable fee income.
Insurance Sector: Life insurers will continue to benefit from favorable equity markets and a strong demand for financial services, particularly in Asia and North America. Meanwhile, property and casualty (P&C) insurers are facing heightened risks due to climate change-related catastrophic events, especially in North America.
Non-Bank Financial Institutions (NBFIs): Mortgage originators are likely to experience a boost from increased refinancing activity, while credit card issuers anticipate stable growth. Auto finance companies and business development companies (BDCs) remain well-positioned, although potential tariffs and trade frictions could create headwinds.
Key Risks: Geopolitical Uncertainty and Regulatory Changes
Despite the largely stable outlook, Morningstar DBRS emphasizes several downside risks:
Geopolitical Tensions: Rising trade barriers, potential tariff implementations, and conflicts such as those in Eastern Europe and the Middle East could disrupt global financial stability.
Regulatory Shifts: The implementation of Basel III reforms in Europe and Canada will influence bank capital structures, while potential regulatory rollbacks in the U.S. under the Trump administration could create an uneven regulatory landscape.
Climate Change: P&C insurers, particularly in North America, face increased exposure to climate-induced natural disasters, necessitating higher reinsurance costs and premium adjustments.
Conclusion: Cautious Optimism with Emerging Challenges
Overall, the 2025 FIG Credit Outlook presents a cautiously optimistic view, recognizing the stable credit environment but also acknowledging emerging economic and geopolitical challenges. While financial institutions are expected to navigate these shifts effectively, continued monitoring of trade policies, regulatory changes, and macroeconomic conditions will be crucial in determining sector performance.
As 2025 unfolds, financial institutions must remain agile, balancing the benefits of a favorable interest rate environment against the risks of global uncertainties.
2025 EBA Stress Test
According to a commentary by Morningstar DBRS, the 2025 adverse scenario of The 2025 European Banking Authority (EBA) stress test incorporates heightened geopolitical tensions, supply chain disruptions, and trade shocks, which pose significant challenges to financial institutions. Despite these uncertainties, European banks enter the stress test in a relatively stronger position than in previous years due to improved financial fundamentals.
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Relevant Links:
https://dbrs.morningstar.com/research/446643/global-2025-fig-credit-outlook-financial-institutions-benefitting-from-benign-operating-environment-but-downside-risks-increase
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