Continued tight financial conditions and a deteriorating credit climate are likely to spell a challenging second half for U.S. banks, says Fitch Ratings.
The rating agency said in a report that U.S. bank earnings will remain under pressure as a slow growth environment, coupled with elevated funding and credit costs, continue to strain banks’ performance.
In the latest quarter, the large U.S. banks’ results were “broadly weaker” on both a quarter-over-quarter and a year-over-year basis, Fitch said. The institutions contended with “an outpacing of deposit costs over asset yields, an uptick in provisions and continued inflationary upward pressure on non-interest expenses.”
On a quarter-over-quarter basis, aggregate net income for the 20 largest banks was down by 7.9%, Fitch reported.
The rating agency said it expects bank performance to remain at similar levels in the second half.
“Net interest margin compression will continue, but at a slower pace in for the rest of the year,” Fitch said, adding that it expects rising credit costs to stabilize in the second half too.
Additionally, increasing funding and credit costs “should be offset by a modest recovery in fee income and better operating efficiency,” it noted.
The banks are also expected to hold high levels of capital, given the economic uncertainty and the prospect of rising regulatory capital demands, the rating agency indicated.
“Capital and liquidity buffers are expected to increase over the coming quarters in response to a more demanding regulatory environment, which mitigates banks’ weaker earnings and is supportive of credit,” Fitch said.
Earlier this week, Moody’s Investors Service downgraded its ratings on a number of mid-sized U.S. banks.