Moody's raises outlook on US banking system

Moody's Tuesday upgraded its outlook of the US banking system for the first time since 2008, citing improving US economic conditions that more than make up for the challenges of low interest rates. Moody's raised its outlook on the US banking system to "stable" from "negative," changing an outlook that had stood since the financial crisis. "Sustained GDP growth and improving employment conditions will help banks protect their now-stronger balance sheets," said Sean Jones, a Moody's associate managing director, in a statement. "In addition, after another year of reducing credit-related costs and restoring capital, US banks are now even better-positioned to face any future economic downturn." Moody's projected US gross domestic product (GDP) growth to be in the 1.5-2.5 percent range in 2013-2014 and a decline in the unemployment rate towards 7.0 percent. The jobless rate stood at 7.5 percent in the most recent monthly US jobs report. Moody's said the low interest-rate environment would be the "single most important issue" driving financial performance in the next 12-18 months. While the low rates promote job growth and boost banks' asset quality, they reduce net interest margins and encourage looser loan underwriting standards as banks seek out higher return. "The most likely scenario that could result in a reversion to a negative outlook on the US banking system would be related to a protracted slackening of underwriting standards," Moody's said.