After bouncing back smartly from the pandemic, banks based in developed markets face earnings headwinds in the year ahead, says Fitch Ratings.

Developed market banks saw their profits return to or even exceed pre-pandemic levels in 2021, a report from the rating agency said, but they’re now facing several profitability challenges.

“We expect costs to rise, exacerbated by high inflation, and loan impairment charges to edge towards pre-pandemic levels due to weaker global economic prospects,” Fitch said.

In particular, elevated inflation is expected to exert upward pressure on banks’ salary costs across all markets, the report said.

“Operating efficiency is deteriorating in North America, particularly for second-tier banks and consumer lenders, due to increasing compliance and IT costs,” it noted.

Alongside the rising operating costs, deteriorating credit conditions are also expected to drive more normal loan-loss provisions, “as inflation weakens individual and corporate borrowers’ capacity to repay, and economic growth slows,” it said. This, too, will weigh on profitability, which was fuelled by reserve releases in 2021.

Additionally, banks may have to seek new funding sources beyond traditional deposits in the year ahead, “as the high deposit inflows of 2020–2021, particularly in North America, could start to reverse,” Fitch said.