U.S. bank headwinds to prevail into 2024: Fitch

Third-quarter results for the U.S. banks highlighted revenue and earnings challenges that are expected to persist in the year ahead, says Fitch Ratings.

The rating agency said most of the U.S. banks that have reported third-quarter results so far revealed ongoing challenges including margin and funding pressures and slowing loan growth.

Revenues for the large U.S banks were generally stable on a quarter-over-quarter basis in the third quarter, and increased on a year-over-year basis, Fitch said.

“Median net incomes increased modestly from [the second quarter], but remained below year-ago levels,” it said. “Net interest margins compressed for the third consecutive quarter across most institutions, with regional banks seeing outsized reductions in response to rising funding costs.”

Fitch said it expects these margin pressures to continue in the coming year.

“While funding pressures due to outflows and rising betas may have largely played out, we do not think that banks have reached the floor on [margin] compression,” it said.

Additionally, the banks’ results indicated that loan growth “continues to decelerate with a marked slowdown in credit cards, which was a rare source of robust origination in recent quarters, indicating a normalization in consumer spending, while commercial growth remained weak,” it said.

At the same time, the banks’ wealth management businesses “continued to be hampered by pressured performance fees and higher deposit costs,” Fitch said.

In the capital markets business, the banks generally recorded strong trading revenues amid elevated market volatility, which offset weakness in investment banking.

Some institutions reported increased merger and acquisition advisory revenues, Fitch said, “signaling that a more fulsome recovery in fees may not be long deferred.”

In the meantime though, the outlook for the banks remains mixed.

While the growth of credit loss provisions has slowed, these reserves may be tapped by “growing net charge-offs from the commercial real estate office segment, and from higher consumer loan delinquencies in card and auto, as seen with the recent build-up of higher-loss credit card balances, amid the depletion of pandemic stimulus savings,” Fitch said.

Additionally, large banks will be building up their capital buffers in the expectation that regulatory requirements are set to rise, it noted.

While the U.S. banking regulators recently extended the consultation period on the final implementation of the Basel III capital rules, Fitch noted that several of the big banks are anticipating large increases in their risk-weighted assets.

Banks will manage the higher capital requirements of Basel III “without much difficulty,” Fitch said, “but the ramp up will likely reinforce the trend of lower loan growth over the near term.”