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Rising credit provisions and expenses weighed on the second-quarter earnings of the Big Six banks, Fitch Ratings reports.

The rating agency said that, while revenues rose 4% year over year on average for the big banks, a combination of loan loss reserves, rising capital and liquidity positions, and elevated expense growth resulted in “lacklustre” earnings.

“Shifting depositor preferences toward interest-bearing term products, combined with continued weakness in mortgage, wealth management and investment banking, pressured top line growth,” Fitch said, while higher provisions and personnel expenses weighed on the banks’ bottom lines.

On average, banks increased their credit provisions by nearly $150 million quarter over quarter and by nearly $500 million year over year, it reported, as credit quality measures deteriorated. Average impaired loan rates and net charge-offs edged higher in the quarter but remained below their pre-pandemic levels.

Additionally, banks built up regulatory capital, “largely reflecting benefits from the implementation of Basel III reforms,” Fitch said. Banks’ liquidity coverage also increased on average, “reflecting prudent positioning after U.S. and Swiss banking sector disruptions earlier in the year.”

At the same time, the banks’ deposit growth slowed, with average deposit growth flat quarter over quarter and up just 7% year over year.

“Deposit trends were markedly negative across the banks’ U.S. subsidiaries, in line with U.S. industry trends,” it noted.

These deposit shifts also weighed on the banks’ net interest incomes.

“Continued headwinds related to provisions, margin management and operating leverage will continue to play out over the coming quarters as monetary policy tightening and inflation squeeze credit demand, asset quality and funding conditions,” Fitch said.