The latest round of earnings reports for the major U.S. banks reveals that recent U.S. interest rate hikes are boosting these firms' margins and profits, according to new reports from a pair of credit-rating agencies.
Second quarter (Q2) results for the banks highlighted positive trends for both earnings and loan growth, says a new report from Fitch Ratings Inc. Banks are also enjoying benign credit costs, improved net interest margins, and lower expenses.
"A combination of factors bolstered earnings: net interest margins inched up for most banks as a result of the recent rate hikes, acquisitions and disciplined retail deposit pricing. Continued modest deposit betas, especially for retail, was reported for most of the large banks," the Fitch report says.
In addition, the banks are continuing to report strong asset quality, historically low net chargeoffs and continued expense discipline, which are also factors that are boosting earnings, the Fitch report says.
Similarly, a new report from Moody's Investors Service Inc. also notes that the banks are seeing continued improvement in net interest margins (NIM).
"Over the past year, average NIM has increased by 15 basis points, boosting banks' profitability. NIM is a key driver for net interest income, which accounts for more than half of most banks' net revenue," the Moody's report says.
"Because the structure of most banks' balance sheets leans toward asset sensitivity, meaning their assets reprice faster than liabilities, we expect that banks' NIM and net interest income will continue to trend upward as the most recent mid-June Fed rate increase takes full effect and when future rate increases occur. The boost to NIM will be tempered by increasing liability costs and a key driver will be deposit costs and balances," the Moody's report adds.
Looking ahead, Fitch indicates that it expects loan growth to remain muted in the second half, noting that the large banks are targeting low to mid-single digit loan growth for the year, according to their public disclosures.
Furthermore, the Fitch report says that the current low level of credit costs is unlikely to continue: "Credit cards and auto loans are most at risk of asset quality deterioration, specifically retail credit cards and subprime auto loans."
Finally, the Fitch report notes that the banks experienced a "marked deterioration" in capital markets earnings in Q2 as higher investment banking revenue was more than offset by worse performance in fixed-income, currencies and commodities.
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