Stronger liquidity and capital profiles will partially insulate US banks against expected challenges to earnings growth and deterioration from low levels of loan losses in 2015, according to Fitch Ratings.
Earnings will be under pressure due to further margin compression, elevated legal costs, ongoing regulatory-related costs, and higher spending on technology.
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High litigation-related costs have had a meaningful impact on large U.S. bank earnings, though manageable in the context of capital. Reserve releases that aided bank profitability measures in 2014 will also come to an end.
Fitch’s outlook assumes no significant deterioration in the economy and/or an unexpected rise in interest rates. For U.S. banks, Fitch believes a gradual rise in rates would have a manageable effect on securities valuations, deposit outflows, earnings and asset quality.
Loan losses remain below historical averages across all major asset classes, with C&I lending as one of the biggest outliers.
Fitch expects non-charge-offs (NCOs) to deteriorate over the near term, especially under a higher interest rate environment, given the unsustainable low amounts of loan losses and ongoing easing in underwriting standards among some asset classes.
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By GlobalDataAmong the individual bank segments, Fitch views the large regional banks (assets >$50 billion) as the best positioned heading into 2015 for the challenging operating environment.
The mid-tier regional ($10 – 50 billion in assets) and community banks (<$10 billion in assets) be under greater operating pressures the rapid C&I loan growth and liability sensitive balance sheet for some.
The trust and processing banks face some regulatory-related challenges, including compliance with the SLR.
