Better than expected profits recorded by U.S. banks in the first quarter will be tough to sustain as credit quality deteriorates, cautions Fitch Ratings.

Credit losses at major banks continue to rise while strength from market-base revenues, such as mortgage origination and fixed income trading, are not likely to persist, the rating agency cautioned.

It also noted that net interest margins have become increasingly constrained by rising levels of non-performing assets and a lack of willingness and ability to fully pass lower market rates to core deposits.

The financial institutions covered in Fitch’s review reported combined net income of US$8.9 billion during first quarter, compared to US$33.3 billion in losses during the fourth quarter of 2008. It says that a resurgence in mortgage refinancing activity was responsible for much of this improvement. And, it believes that the industry is poised for another strong quarter in mortgage originations, but it warns that revenues from this business are expected to slow, possibly materially, in the second half.

The firm maintains a negative outlook on U.S. bank ratings, reflecting its concerns that banks continue to face ongoing material challenges, and the potential for further rating downgrades.

Fitch says it expects that banks will exhibit continued increases in loan delinquencies, non-performing assets and, in many cases, net-charge offs for at least several quarters as the economic outlook remains uncertain.

IE