Quarterly earnings generally improved for U.S. banks in the first quarter of 2017, but loan growth came to a halt and loan losses are likely to increase over the near to medium term, according to Fitch Ratings’ U.S. Banking Quarterly Comment. Provision expenses for the 18 largest U.S. banks covered in the report rose 8% in 1Q17 from 4Q16 and loan losses in nominal terms increased on a linked-quarter basis. Growing concern in asset quality, particularly in credit cards, auto, and retail loan exposure from the disruption of e-commerce could contribute to increased loan losses going forward.
“Better capital markets results, lower taxes from new accounting guidance and modest improvement in spread income boosted earnings for the majority of U.S. banks, however, loan growth came to a standstill, expenses and credit costs climbed and mortgage revenue slowed during the quarter,” said Julie Solar, Senior Director, Fitch Ratings.
Overall industry-wide loan balances declined 2.5% on an annualized basis. For the large U.S. banks, this trend was less pronounced, with total loans down approximately 0.8% on an annualized basis. Pay-downs in energy credits, large corporate borrowers accessing the capital markets, discipline in maintaining risk-adjusted returns, and seasonally lower credit card balances all contributed to the decline in loans. Many borrowers are also waiting for more definitive policies from Washington despite improving business optimism before borrowing.
“Looking ahead, loan growth will be dependent on continued economic growth and will vary by loan category particularly with concerns in auto and signs that banks are demonstrating greater commercial lending discipline,” said Joo-Yung Lee, Managing Director, Fitch Ratings.
Twelve of the 18 banks reported higher net income in 1Q17 than in 4Q16 and several banks reported increases in net interest margins (NIM) including M&T Bank, Bank of America, Fifth Third Bancorp, and BB&T. The better NIM is largely due to the December 2016 interest rate increase as the March rate rise came too late in the quarter to materially impact the results. Capital markets results for the five large global trading and universal banks increased 19% in aggregate from 1Q16, with most of the improvement in equity and debt underwriting, up 92% and 51%, respectively, from the prior year.
In addition, several banks benefited from one-time tax benefits from the adoption of new stock-based compensation guidance. Goldman Sachs saw a large benefit witch the change accounting for 21% of its income. The new guidance is expected in impact first quarter results going forward.
Bank capital ratios remain solid with a median CET1 of 10.8% at March 31, 2017. Commentary from banks indicates that capital distributions will increase across the industry.
