The profits of large U.S. banks may come under pressure in the months ahead as provisioning for loan losses outpaces revenue growth, says Fitch Ratings in a new report.
The rating agency reports that first quarter financial results for the large U.S. banks indicate that asset quality improvements are slowing, and provision expenses increased during the quarter. As a result, reserve releases fell to $2.5 billion among the 12 large U.S. commercial banks from $4.3 billion in the previous quarter.
Fitch says that reserve releases accounted for 9% of pre-tax earnings on average for the big banks during the quarter, down from an average of 12% last quarter. And, it expects that trend to continue.
“We expect reserve releases to continue to decline and likely reverse in 2014 as there is little room for further improvement in asset quality,” it says, adding that the Office of the Comptroller of the Currency (OCC) has also stepped up regulatory scrutiny of loan loss reserves and the magnitude of releases.
This, in turn, may start to impact bank earnings, Fitch says. “A waning of reserve releases over time may pressure earnings for banks where results benefitted particularly from lower provision expenses,” it says.
“Assuming provision expenses rise with more robust economic growth, the individual impact maybe more muted. However, if provisioning increases without commensurate rise in top line revenue growth, bank profitability may be pressured,” it says.
Fitch also says that lenders are gradually lowering their standards to stimulate loan growth, particularly in commercial and industrial, commercial real estate, credit cards, and auto loans. “As a result, asset quality may deteriorate as these lower quality loans season, especially in a higher interest rate environment that could pressure the more marginal borrower,” it says.