The 2011 rating outlook for U.S. banks, brokers, and investment managers is stable for 2011, Fitch Ratings says.

The rating agency says that its outlook for the U.S. securities industry is stable “as firms continue to maintain improved liquidity, lower leverage and well-defined franchises”. Fitch also expects tempered market and credit risk appetites to prevail in light of the tenuous global economy and evolving regulatory landscape.

Fitch says that the regulatory reforms in response to the financial crisis have mixed implications for the U.S. securities industry, depending on each firm’s composition of businesses and relative market position. “For some, revenue and profit potential may be pressured as activities are eliminated. For others, standard pricing in central clearing may prove to be beneficial,” it says. Fitch also expects firms to proactively position their franchises for ongoing compliance, while maintaining their profit-generating capacity.

For the U.S. banking industry, Fitch indicates that the outlook will remain stable “as balance sheet and income statement fundamentals will improve modestly against a backdrop of still weak macro conditions”.

“U.S. banks will continue to grapple with weak revenue and loan trends due to the economy and legislative changes affecting fee income. Banks will also continue to work through problem credits, mainly concentrated in residential and commercial real estate,” Fitch says. “However, Fitch expects that new inflows of problem credits will subside and that banks have largely reserved for the losses that remain.”

Fitch also anticipates that M&A activity will intensify in the banking business in 2011, “as industry revenue challenges remain unabated and shareholder pressures increase.”

Moreover, it notes that regulatory and other policy changes remain a source of uncertainty for the industry. “Other considerations include ongoing legal and regulatory investigations, potential changes to U.S. accounting rules regarding fair value of loans, and the ongoing Euro sovereign debt crisis,” it adds.

Fitch also sees a stable environment for investment managers citing both continued low interest rates, but also regulatory uncertainty. “The low interest rate environment continues to pressure earnings on managers that sponsor money market funds,” it says, adding, “Pending regulatory changes pose a challenge to all sectors of the industry, although any operational impact is likely to be felt after 2011. Fitch believes most investment managers should be able to navigate these changes, although the level of challenge posed will depend on the wording of final regulations and court interpretation of the rules.”

Performance will be firm specific, Fitch says. “Strong earnings performance is dependent on each manager’s ability to grow its base of assets under management or client assets, which, in turn, depends on solid investment performance and the ability to generate new mandates. For alternative managers, performance will also depend on the ability to influence operating improvements at portfolio companies and identify appropriate new investment and exit opportunities,” it says.

IE