The economy’s performance, interest rates, and regulatory issues, will be the dominant forces affecting U.S. banks in 2014, says Fitch Ratings in a new report.
The rating agency said Thursday its credit and sector outlook for U.S. banks is stable for 2014. Banks have been focused on expense control, given the weak economic recovery, Fitch notes. And, it says that they will need to continue improving their cost structures in the year ahead, “with high costs partially associated with unresolved issues from the financial crisis and increased regulatory costs”.
Litigation risk remains a factor for banks in 2014, Fitch says, despite the fact that numerous legal and regulatory settlements have already occurred this year. Litigation has not been a ratings factor for most banks, it notes, “although more aggressive investigations and/or large, unexpected fines could affect ratings in the future,” it warns.
Additionally, it notes that global banks are actively preparing for compliance with the new Basel III capital and liquidity rules. Fitch says that it believes most U.S. banks to be well positioned to meet the new capital standards.
The economy and interest rates will also be key to their fortunes in the year ahead, it suggests. Indeed, Fitch says that the rapid increase in interest rates in the second quarter of 2013 demonstrated that the low rate environment will not last forever.
Most of the banks Fitch rates are ‘asset sensitive’, it says, and should benefit from rising rates. Although, it notes that, “Any uplift that banks receive will depend on the steepness of the yield curve and whether short-term rates will rise.”
And, it notes that commercial and industrial (C&I) lending has been on the rise, driven by a combination of ongoing competitive pricing pressures and some relaxation of lending standards. Fitch says it believes this could lead to asset quality erosion for C&I loans, particularly if interest rates climb.