The global banking sector is moving into a more volatile phase as rapid digitalization, expanding use of artificial intelligence (AI), climate-linked vulnerabilities, and rising cyber risks reshape core business models. A new report by S&P Global Ratings warns that these shifts will create both long-term opportunities and structural pressure, with technology adoption becoming a key dividing line between resilient and fragile banks.
According to the report, competitive advantage is no longer defined by branch networks, but by how effectively banks deploy AI, data, and digital infrastructure. Institutions that invest early and manage new risks prudently are expected to strengthen their position, while laggards face margin pressure, higher operating costs, and potential loss of market share to AI-native players.
AI, Digital Platforms, and New Entrants Redefine Banking Competition
S&P highlights that AI-led fintechs and new digital-first players are steadily eroding traditional banks’ dominance, especially in payments, consumer lending, and SME financing. These firms benefit from lighter legacy IT burdens, faster product cycles, and more flexible data architectures, allowing them to scale quickly and personalise services at lower marginal cost.
For incumbent banks, this means the competitive benchmark has shifted. Their future strength will depend on integrating AI across credit analytics, customer engagement, fraud detection, compliance, and operations. S&P notes that many large banks are already deploying AI to streamline loan underwriting, automate processes, and deliver tailored digital services, but warns that uneven adoption could widen performance gaps across the sector.
At the same time, the report stresses that regulators are paying close attention to AI in financial services, especially around model risk, explainability, and consumer protection. Banks that move fast without robust controls may face reputational damage, supervisory action, or systemic risk concerns.
Transformation Costs Climb As New Risks Emerge
The report underlines that AI-driven transformation is capital- and skill-intensive. Banks must fund investments in high-performance computing, cloud infrastructure, modern data platforms, and advanced cybersecurity, while competing for scarce AI and engineering talent. Many are also becoming more dependent on third-party technology providers, which introduces vendor concentration and resilience risks.
S&P notes that these costs can compress profitability in the short term. However, if executed well, AI programmes can improve cost-to-income ratios, support better risk pricing, and strengthen customer retention through more relevant products and services. Over time, these structural benefits can offset the upfront financial burden.
At the same time, AI adoption brings new forms of risk. The report points to algorithmic bias, opaque decision-making, data privacy concerns, vendor dependency, and a higher exposure to sophisticated cyberattacks targeting both infrastructure and data. This dual effect — new risk vectors but more powerful risk tools — will heavily influence credit profiles, operational resilience, and regulatory scrutiny.
Credit Losses Expected To Rise, With Asia-Pacific Driving Much of the Stress
S&P Global Ratings forecasts that global banking credit losses will rise in the coming years as macroeconomic uncertainty, consumer leverage, and sector-specific stress build up:
2026 credit losses: around USD 655 billion, up roughly 7.5% from 2025
2027 credit losses: about USD 683 billion, a further 4.3% increase
A large portion of this pressure is expected to come from the Asia-Pacific region, where small business exposure in China and rising consumer credit risks in some markets are key concerns. S&P believes the sector is entering this period from a relatively strong starting point, supported by tighter regulation post-global financial crisis, higher capital buffers, and improved asset quality in many systems.
Even so, the rating agency cautions that uneven growth, climate-related shocks, and prolonged higher interest rates could amplify stress in vulnerable segments, especially for banks with weaker risk controls or concentrated loan books.
Innovation vs Stability: Where Banks Draw the Line Will Matter
The report concludes that AI is neither a pure threat nor a one-stop solution for the banking industry. Instead, it represents a structural shift that demands clear strategy, disciplined execution, and strong governance. Banks that integrate AI into their core processes while investing in cybersecurity, model governance, transparency, and customer trust are more likely to emerge stronger.
Those that underinvest or lag in digital adoption risk shrinking relevance, weaker profitability, and increased vulnerability to both traditional and technology-driven shocks. As the financial system becomes more data- and AI-intensive, S&P argues that the central challenge for banks will be to innovate at speed without letting risk management fall behind.
