S&P Global Ratings: Large Banks Likely to See Stable Financial Performance Amid Headwinds

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Earnings at most of the eight U.S. global systemically important banks improved from the same quarter last year, largely because of higher net interest income, reported S&P Global Ratings, New York.

But earnings fell from the prior quarter due to higher provisions for credit losses and lower noninterest revenue, S&P Global Ratings said in Large U.S. Banks 2Q 2023 Update: Stable Financial Performance Amid Headwinds, a non-rating action report.

The banks included Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., and Wells Fargo & Co. S&P Global Ratings also included Northern Trust Corp., which is a peer of the trust banks–Bank of New York Mellon Corp. and State Street Corp.

The report said net interest income may decline each quarter this year, “[but] we still expect NII will rise for the full year, albeit more slowly than in 2022. Fee income will likely remain tepid, with results hinging on performance of mortgage banking, capital markets and wealth management activities,” S&P Global Ratings said.

Other highlights from the report:

• GSIBs delivered a return on average equity of 11.0% at the aggregate in the second quarter, up from 9.7% in the prior-year quarter, but down from 12.2% in the prior quarter.Loan growth slowed from robust levels while net interest margin sequentially contracted in the second quarter as funding costs more than offset loan yields.

• Most asset quality measures have remained strong by historical standards, “though we expect continued normalization,” the report said. “We expect delinquencies and charge-offs to gradually rise toward historical averages. We are particularly watching price declines and maturities in commercial real estate, and we expect provisions for credit losses to continue to increase from last year’s low levels.”

• GSIBs built more capital in the second quarter and have excess over their updated minimum capital requirements. “However, the recent regulatory proposal relating to the Basel 3 endgame could result in higher requirements,” S&P Global Ratings noted. “We think GSIBs will accrete capital through earnings retention, mainly on caution about the economy and the Basel III endgame proposal. Consequently, we expect capital distributions will be at a measured pace.”

• Deposit levels continued to trend downward on higher interest rates and quantitative tightening, resulting in weaker funding and liquidity metrics from historically strong levels. “As long as the Federal Reserve continues to quantitatively tighten, deposits and liquidity most likely will continue to decline from robust levels,” the report said.