Second quarter earnings reports from the big U.S. banks show that legal costs and weakness in the fixed income, currency and commodities (FICC) business are hampering earnings, says Fitch Ratings.
The rating agency reports that net income for the 17 largest U.S. banks decreased in the second quarter. “For the top-six U.S. banks, core results were lower on average, from both the prior quarter and last year,” it says. “These results reflected lower capital markets results and ongoing legal expenses.”
“High litigation-related costs, mainly mortgage-related, continue to plague the large U.S. banks,” it says, adding that it expects that these costs “will remain elevated over the near term as several major issues are yet to be resolved.”
Additionally, Fitch says that regulatory and compliance related costs are also on the rise at the large banks. This is partially undermining banks’ efforts to find cost savings through layoffs and other efficiency initiatives. Yet, Fitch also notes that lower provision expenses, and improved mortgage banking results, along with some one-time gains, helped offset some of the weakness.
Finally, the rating agency notes that the banks continue to report historically high deposit levels. However, Fitch warns that these deposits could be vulnerable to a rapid outflow, or repricing as the Federal Reserve winds down its quantitative easing policy.