Fitch completes review of 12 big global banks

The list of banks includes: Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland, Societe Generale and UBS. Fitch plans to publish separate commentaries on each of the banks outlining its views. A review of the 13th firm, HSBC Holdings plc, will be completed in the next two months, it says.

In the meantime, Fitch notes that the banks are generally increasing their capital ratios, reducing risk-weighted assets and leverage, improving liquidity, and demonstrating lower market risk appetite, which is supportive for ratings.

However, it says they also continue to face “meaningful fundamental headwinds”, such as: the challenging macro-economic environment; volatile market conditions; and a growing regulatory burden, coupled with ongoing regulatory uncertainty. “These negative factors all affect the returns banks are able to generate, while the positives suggest that the returns will at least be more stable than in the past,” it says.

Fitch says it expects earnings pressure for these big banks will remain well into 2013 and most likely beyond. “Uncertainty regarding the scope of the banks’ business models and activities remains as regulation continues to evolve and rule-making is incomplete,” it says. “It is difficult to judge at this stage the extent to which the total pool of revenue will be reduced and whether this will be balanced by a reduced number of banks sharing the pool.”

Additionally, market activity is persistently low and will remain so until clarity emerges on the direction of the European and global economies, Fitch adds. And, it says that these firms face constant challenges in connection with litigation or operational failures, such as rogue trading incidents. Their size and complexity makes them particularly vulnerable to legal, operational and reputational issues, it says, noting that these risks are difficult to quantify and cannot be fully covered by capital or liquidity buffers.

At the same time, these large firms also implicitly enjoy government backing, it suggests. Fitch says it thinks it is unlikely that regulators will allow one or more large, complex and systemically interconnected banks to default while the current crisis persists and before regulation around resolution is more advanced and aligned among jurisdictions. Nor would policymakers want to test a new resolution process “when the global economy is at its current fragile stage and before global market conditions normalise,” it says.