Credit and financing challenges for US banks will continue

Combined net income for the 20 largest US banks fell 7.9% on a quarterly basis, according to Fitch Ratings.


The performance of US banks should continue to face challenges in the second half of 2023, with slowing growth amid rising financing and credit costs extending the decline in performance, especially for small and medium-sized institutions, according to a report from credit rating agency Fitch.

The results of the second quarter of 2023 reflected an excess of deposit costs over asset returns, a rebound in provisions, and continued upward inflationary pressure on non-interest expenses.

“Results for the top 20 US banks for the second quarter were generally weaker on a consecutive quarter and year-over-year basis, largely in line with our expectations,” the report said.

Net interest margin compression will continue, but at a slower pace for the remainder of the year. Net income for the 20 largest US banks combined decreased 7.9% on a quarterly basis. On a year over year basis, total net income was up 4.9%, but it was negative for most of the names. The impact on ratings of the beta deposit increase is expected to be modest, assuming the Fed is nearing the end of its rising cycle.

Credit cost growth will stabilize in the second half of 2023 given the early nature of reserves building. US banks should continue to perform at similar levels for the rest of the year, based on the forward rate curve and Fitch’s forecast of a mild recession in the fourth quarter and first quarter of 2024. In addition, although the slowdown, increases in funding and credit costs should be offset. Modest recovery in fee income and improved operating efficiency.

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Banks will hold higher levels of capital given the uncertain macroeconomic outlook and proposed regulatory capital requirements. Most banks benefit from proper rating spread amid credit quality that has normalized to pre-pandemic levels.

“Capital and liquidity reserves are expected to rise in the coming quarters in response to a more demanding regulatory environment, which will cushion weak bank earnings and support credit,” the agency says.

Aileen Morales

"Beer nerd. Food fanatic. Alcohol scholar. Tv practitioner. Writer. Troublemaker. Falls down a lot."

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