Fitch: Rate Environment Takes Toll on US Bank Earnings
Third-quarter results were affected by increased market volatility, interest rate uncertainty, pressures in oil and gas, and a slowdown in mortgage activity. Offsetting these trends were generally lower expenses and still very benign credit costs. Despite the slight earnings improvements, ROEs remain very depressed relative to precrisis levels.
Going forward, controlling expenses will remain a key theme for the big US banks given the market's lowered rate expectations following the September FOMC announcement. Virtually all of the largest US banks achieved lower expenses on a linked-quarter basis. The absence of land and branch valuation charges and lower legal and regulatory charges were some of the main drivers.
Bank of America, Citigroup, JP Morgan Chase, Goldman Sachs and Morgan Stanley all reported lower capital market revenues on a linked-quarter basis. Lower client activity and increased volatility in the markets were blamed. Much of the decline was due to lower equity underwriting revenues, which fell 53% linked-quarter, and 44% from a year ago. FICC revenues also fell sequentially and from a year ago due to volatility in the global markets.
Mortgage results fell following the seasonally strong spring selling season. The application pipeline declined at the end of second-quarter 2015, thus results were within expectations. Mortgage revenues will likely decline further in fourth-quarter 2015 given the seasonally slower winter selling season.
Most of the commercial banks included the big US bank universe reported lower reserve releases, primarily driven by deterioration in energy portfolios, offset by still improving nonaccrual levels. While the impact of falling oil prices has yet to result in material loan losses for the large banks, most of the banks reported increases in energy-related problem assets.
Net charge-offs remain unsustainably low.
Fitch expects that the banking industry overall will begin building loan loss reserves, primarily driven by loan growth, slowing improvement in certain asset classes and oil-related deterioration. As interest rates begin to rise, this will likely affect credit quality and may contribute to higher loan losses and loan loss provisioning over the medium term.
Capital ratios, on average, increased during the third quarter, reflective of retained earnings growth and essentially no balance sheet growth in aggregate. The fully phased-in common equity tier 1 for all of the banks included in Fitch's analysis was a robust 10.5%. We expect this historically high level of capital will be managed down over time through both increased shareholder distributions and organic growth, especially for those banks not subject to a systemically important capital surcharge.
A complete report on the third-quarter 2015 earnings of the largest US banks may be found in: "U.S. Banking Quarterly Comment: 3Q15" at fitchratings.com.
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