Despite weaker trading revenues, the U.S. banks that have reported fourth quarter results are still generating solid earnings, says Fitch Ratings.
In a research note, the rating agency said U.S. banks’ latest earnings are largely in line with expectations, as accelerating loan growth, strong fee revenues, and benign credit conditions offset lower trading activity. Large U.S. banks including Goldman Sachs, Citi and Morgan Stanley have reported earnings for the latest quarter.
In their capital markets businesses, the large banks saw trading volumes in both the equity and fixed income, commodities and currencies (FICC) segments continue to normalize in the fourth quarter while investment banking remained strong, Fitch noted.
“M&A advisory pipelines are setting up for a strong year, although some moderation is expected in [the second half of 2022],” it said.
“Growth in trading and new issuance businesses is expected to be tempered,” it said. “However, higher rates and increased volatility could be constructive to trading businesses, particularly FICC.”
At the same time, banks saw a pickup in loan growth compared with the prior quarter, “a trend that management teams are seemingly optimistic will continue and is consistent with our 2022 expectations.”
Credit conditions remained strong, against the backdrop of a robust recovery and healthy labour markets, it said.
“However, as loan growth is expected to pick up, meaningful reserve releases are likely over,” it noted.
Additionally, Fitch said that expense management was key during the fourth quarter, “particularly for banks with large capital markets exposure that experienced upward compensation pressure.”
Banks with more traditional lending businesses and less capital markets exposure “should be better positioned to benefit from interest rate hikes and should experience greater operating leverage, all else equal,” the report said.