The latest round of stress tests for the big banks in the U.S. highlights the sector’s improving resilience, says Fitch Ratings in a report published on Friday..
Yesterday, the U.S. Federal Reserve Board released the results of its 2016 stress tests on the largest U.S. banks, which found that their balance sheets would hold up, even in a severe downturn. Overall, the banks “generally performed better, posting higher capital ratios and smaller declines in capital ratios than in the past,” Fitch says in a statement.
The rating agency reports that almost three quarters of the projected US$526 billion in losses under the “severely adverse” scenario used in the stress tests was due to loans, while 21% came from trading and counterparty positions.
“Projected loan loss rates varied significantly from 3.2% on domestic first lien mortgages to 13.4% on credit cards,” Fitch adds. As well, the projected loss rate for domestic commercial real estate loans improved by 160 basis points to 7%, while the rate for commercial and industrial loans deteriorated, rising 90 bps to 6.3%. “C&I loan growth has been strong and the weaker performance may reflect energy sector weakness within these portfolios,” Fitch says.
Credit card issuers and trust and processing banks performed well in the latest stress tests, with the least capital erosion.
“The largest global banks generally performed better than last year, although they still account for over half of projected losses under the severely adverse scenario, since they are subject to global market shock and counterparty default component,” Fitch adds.
Notwithstanding that the banks fared relatively well quantitatively, Fitch cautions that the threat of their capital plans being rejected for qualitative reasons under the forthcoming Comprehensive Capital Adequacy Review (CCAR) process, “is still a significant hurdle.” The results of the CCAR will be released on June 29.