Fitch Ratings has affirmed its ratings on 12 global financial firms, saying regulatory reforms have helped bolster their stability, although various challenges remain.
The rating agency said Thrusday that it has concluded its latest review of 12 global trading and universal banks (including Bank of America, Barclays Bank plc, BNP Paribas, Citigroup, Credit Suisse AG, Deutsche Bank AG, Goldman Sachs, HSBC Holdings plc, JPMorgan Chase & Co., Morgan Stanley, Societe Generale, and UBS AG) with a stable outlook.
It says that positive rating drivers include improved liquidity, funding, capitalization, and more streamlined businesses, all partly driven by regulation.
On the downside, the industry still also faces substantial earnings pressure, regulatory uncertainty, and heightened legal and operational risk, it adds. In particular, it says that each of the banks is a leading player in at least some securities markets, and that securities trading generally represents a notable component of the business model; which exposes them to potentially high market and operational risks.
The banks all have solid franchises in either domestic and international commercial and retail banking, or in other businesses not focused on securities trading, including wealth and asset management, Fitch says. These activities, which generate potentially less volatile earnings, and also important sources of more stable customer funding, it adds.
Fitch says that the operating performance of the banks has strengthened as market conditions improved in the first quarter, and loan losses in the US and Europe remain easily manageable. However, it notes that their results were affected by sizable litigation- and regulation-related charges, and Fitch expects further costs as legacy issues are dealt with. A number of the banks are also incurring restructuring costs, which should improve operating efficiency over the medium-term.
In terms of capital, Fitch expects them to reach their new Basel III requirements in the coming quarters. It also expects balance sheet leverage to improve, particularly at the European firms, where leverage tends to be higher.
However, regulatory headwinds are expected to continue too, with Basel III regulations, financial reforms, resolution and recovery regimes, and other initiatives, being introduced. Fitch expects these challenges to continue to affect profitability, but it says that the banks should be able to adjust their business models to operate under the new requirements.