Amid continued economic recovery, U.S. banks are fuelling their bottom lines with rising reserve releases — a trend that’s expected to continue driving earnings in 2021, said Fitch Ratings in a recent report.
The rating agency reported that stronger economic performance and improved growth expectations resulted in U.S. banks doubling the size of their reserve releases in the first quarter, which pushed their combined net income to nearly US$60 billion.
Further reserve releases are expected to support bank earnings throughout 2021, Fitch said, noting that the banks it covers added more than US$50 billion to their aggregate allowance for credit losses (ACLs) in 2020.
As a result, Fitch said that reserve releases “could be supported well into 2021 by the expectation of lower default rates as government stimulus continues to allow consumers to de-lever…”
Ongoing pressure on net interest margins amid continued low interest rates and weak loan demand offset some of the earnings momentum provided by reserve releases, the report noted.
“Corporate borrowers have either remained cautious about taking on bank debt or have sufficient access to the capital markets for liquidity needs,” Fitch said.
Still, Fitch said the first quarter may represent a low point for spread revenue, as longer-term rates have edged higher and modest loan growth is expected in the rest of the year.
“Bank rating outlooks have generally stabilized since the beginning of the year, driven by credit quality that has performed better than expected when the pandemic started and capital levels that have remained robust,” said the rating agency.
Once banks are able to resume share buybacks, Fitch expects capital ratios to head lower in the rest of 2021 and into 2022.