Margins and profits were under pressure at the major U.S. banks in the first quarter amid the continuing low interest rate environmen, Fitch Ratings says.
The rating agency reports that first quarter earnings were mixed for the large U.S. banks “as the industry continued to contend with low interest rates”. The six biggest banks saw mostly stronger results in their core businesses for the quarter, Fitch says, due to robust capital markets revenues. However, earnings fell for the large regional banks.
“Improvements in capital markets activities and the absence of material legal fees boosted earnings” at the major global trading banks, Fitch reports. “Contributions to capital markets earnings from fixed income currency and commodities benefited from volatility in the first quarter, whereas high volatility in the prior linked quarter had hurt results,” it notes.
Yet, for regional banks, Fitch says that the prolonged low interest rate environment is continuing to weigh heavily on earnings. It reports that loan balances remained essentially flat; and, as new loans are being booked at lower rates, the banks are facing continued margin compression.
Fitch also reports that 11 of 16 large U.S. banks reported lower expenses in the first quarter, partially due to lower legal costs. “Some of the decrease was due to the lack of litigation-related charges, which more than offset continued spending on technology enhancements, cyber security efforts and increased regulatory and compliance spending,” it says; adding that asset quality remains good, and that net charge-offs remain very low for the industry overall. However, most banks reported higher provision expenses during the quarter, it notes.
“Looking ahead on rates, it is unclear whether economic data will support interest rate hikes beginning in June or not. Absent any movement in short rates, we believe banks’ spread earnings will remain under pressure, assuming continued modest growth in balance sheets,” it concludes.