The old adage that there are only two types of predictions about the future - lucky or wrong - is particularly apt at the moment as the current environment is marked by high levels of uncertainty.
Factors driving this uncertainty are well known and include a lack of clarity in US federal government policy; the impact of higher interest rates from the US Federal Reserve; the UK's exit from the EU; North Korea's ongoing military provocation; and geopolitical tensions involving Qatar.
On top of this is uncertainty about how consumers, borrowers and investors will respond once central banks around the world finally begin to normalize monetary policy in earnest, according to Standard & Poors.
In addition, many banking systems have yet to fully address the changes to their business models and cost reductions that are needed to build sustainable profits. Nevertheless, for now, the rating agency said, of the 89 banks studied, 61 per cent now have stable trends up from the 47 per cent recorded last November.
However, a new potential headwind for the world’s lenders relates to accounting changes, which will likely increase banks’ loss provisions starting next year.
For banks reporting under International Financial Reporting Standard 9 the rules will shift the accounting for credit losses to a more forward-looking, counter-cyclical "expected loss" impairment model, under which credit losses will be recognised earlier than they are under the current "incurred loss" model.
Broadly, the new rules require banks to provide a credit loss allowance that represents 12 months of expected credit losses for all performing loans, as well as an allowance for bad loans based on an estimate of lifetime losses.
“In our view, the requirement for a 12-month expected loss provision on all performing loans, and a lifetime expected loss provision on underperforming loans and NPLs, will cause loss provisions to increase when banks initially apply IFRS 9," said S&P.
“Thereafter, the volatility of the provision is also likely to be greater, as banks review and update their expectations about future conditions at each reporting period."
To date, the ratings agency claimed, few banks have yet disclosed meaningful quantitative information about the expected impact of IFRS 9.
Although changes in accounting rules only affect the way banks report - and don’t alter anything - S&P said the IFRS 9 could reveal fragilities that have so far not been identified - such as previously significant weaknesses in provisioning policies.
“Also, higher loan-loss provisions reduce our measure of capital - total adjusted capital, the numerator in our risk-adjusted capital ratio - and thereby reduce the RAC ratio."
In the longer term, the agency claimed, the application of IFRS 9 may cause banks to change their strategies. For example, they could shift toward shorter-duration loan products, rather than longer-term loan products, to achieve a more favorable accounting outcome.
“Similarly, we could see a move toward higher pricing on certain loan products (such as corporate loans or mortgages) to compensate for higher loan provisions.”