Fitch: 4Q14 Earnings Mixed for Big US Banks; Eyes on Oil, Rates

Earnings for the 17 largest U.S. banks were mixed in fourth-quarter 2014, with large regional, and trust and processing banks posting fairly good results, and global trading and universal banks (GTUBs) performing weaker, says Fitch Ratings.

Revenue growth across the 17 banks remains impacted by low interest rates and relatively modest loan growth, placing pressure on spread income. C&I loan growth been a bright spot, though loan yields have not fared as well, falling by an average of roughly 30 bps over the same period. Some banks reported incremental margin compression attributed to liquidity-related actions, particularly put on last quarter, to meet the phase in of the new liquidity coverage ratio.

Expenses continue to be challenged, with 11 of the 17 banks reporting higher spending on a sequential basis for litigation, technology enhancements, such as cybersecurity efforts, and regulatory and compliance efforts.

While oil and gas lending is attracting much attention, we believe that direct-loan exposure to energy-related companies is manageable. None of the 17 large banks has more than 5.0% exposure to energy related loans. However, there may be impacts to C&I loan growth, CRE asset quality, capital markets revenues, and certain regional economies that have been particular benefactors of the energy boom. However, these impacts may be partially offset by benefits to the consumer of lower gasoline prices. The ultimate impact will be dependent on the duration and severity of downward oil price movements.

Net charge-offs (NCO) remain very low in general for the industry, but most banks reported higher loan losses on a linked-quarter basis. Reserve releases, as a percentage of pretax income, were particularly high for Citi, Regions Financial, and to a lesser extent, Fifth Third and Bank of America. Fitch expects the contribution of reserve releases to earnings to continue to diminish.

Capital ratios fell slightly in fourth-quarter 2014 on average, reflecting share repurchase activity and balance sheet growth, offset by retained earnings. The slight drop reverses a multi-quarter trend of capital ratios increasing. Fully phased-in Common Equity Tier 1 (CET1) across the 17 banks still averages a relatively robust 10.2%. Fitch expects that the historically high level of capital will be managed down over time through both increased shareholder distributions and organic growth, though remain above precrisis levels.

For the five U.S. GTUBs, earnings were impacted by a sizeable drop in capital markets activities and continuing legal fees. Capital markets revenues for the group in fourth-quarter 2014 were down 17% on a linked-quarter basis, and down 11% from a year ago. The return of volatility in October, and then again in December, led to reduced liquidity, and much worse fixed income currency and commodity results than previously guided. Bright spots were seen in advisory, due to strong M&A deal values, and debt underwriting on a sequential basis, as issuers took advantage of a receptive market.

Fitch expects the GTUBs' litigation-related costs to remain elevated over the near term, with a host of pending issues, including LIBOR-related investigations, possible currency market manipulations and legacy private-label securitizations, still to be resolved.

With little short-term interest rate movement expected in first-half 2015, bank revenue growth is likely to remain challenged over the near term. Earnings will be further impacted by hard to sustain cost controls and rising provisions. Offsetting these pressures may be a boost from mortgage refinancing activity, while advisory fees are expected to remain solid.

A complete report on the fourth-quarter 2014 earnings of the 17 largest U.S. banks may be found in "U.S. Banking Quarterly Comment: 4Q14" at fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: U.S. Banking Quarterly Comment: 4Q14 (All Eyes on Oil Prices and Interest Rates)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=849388

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.