Fitch: U.S. Banks’ Earnings and Loan Growth ‘Positive but Muted’

Another season of bank quarterly earnings has come and gone. Fitch Ratings, New York, said second-quarter results for U.S. banks underscored existing trends with earnings and loan growth “broadly positive but still muted.”

The Fitch analysis, U.S. Banking Quarterly Comment: 2Q17, noted benign credit costs, slightly improved net interest margins, lower expenses and modest deposit betas were all positive factors for earnings in the quarter, although overall return metrics remained low.

A combination of factors bolstered earnings, Fitch said: net interest margins inched up for most banks as a result of the recent rate hikes, acquisitions and disciplined retail deposit pricing. Continued modest deposit betas, especially for retail, was reported for most of the large banks. Strong asset quality with historically low net charge-offs in the second uarter and persistent expense discipline also continued to be positive factors for earnings.

However, Fitch Senior Director Julie Solar said second quarter results had “notable challenges,” some of which could act as headwinds in the future.

Yield curve flattening presented a challenge to more robust net interest margin growth for some banks and could affect future earnings growth,” Solar said. “Continued Fed rate hikes could also pressure low retail deposit betas that have been reported thus far. Notably, many of the earnings calls featured discussion about how wholesale depositors would behave in the future with further monetary tightening, which may lead to further deposit outflows.”

The report also noted a “marked deterioration” in capital markets earnings in the second quarter, with improved investment banking revenues more than offset by worse performance in fixed income, currencies and commodities. Low market volatility in second quarter likely drove the decline in year-over-year terms, in contrast with the increased activity resulting from the Brexit referendum a year ago.

Fitch said large U.S. banks continued to show solid capital, with capital ratios increasing on average in 2Q17. The median Common Equity Tier 1 ratio rose to 10.9% in the quarter.

Fitch said it expects loan growth to remain muted in the second half of 2017 after it rose by 3.1% quarter on quarter on an annualized basis for the 25 largest banks in the second quarter, up from negative 1% in first quarter. Most of the growth in the second quarter was from credit cards and other loans. According to public disclosures, large banks are targeting between low and mid-single digit loan growth for the year.

“The low level of credit costs are also unlikely to continue,” Fitch said. “Credit cards and auto loans are most at risk of asset quality deterioration, specifically retail credit cards and subprime auto loans.”