west wacker drive skyline in chicago as seen from the city river

Higher loan loss provisions and rising funding costs hit U.S. bank earnings in the fourth quarter, Fitch Ratings reports.

In a new report, the rating agency said that earnings declined, on a year-over-year basis as the U.S. banks built up their credit provisions, amid a weaker economic outlook.

“Consumer credit performance, while still better than pre-pandemic levels for most banks, began to normalize at a faster pace in [the fourth quarter], particularly in credit card and auto loans,” it said.

The rise in loan loss provisions was partly offset by strong growth in net interest income and improved net interest margins in the fourth quarter, but Fitch said these trends are expected to weaken in 2023.

Capital markets also had mixed effects, with elevated volatility driving strong trading revenues, but weighing on investment banking activity.

“Given the sharp decline in [investment banking] activity last year and barring a deep recession, strong pipelines and pent up demand could support a moderate recovery in 2023,” it said.

Additionally, deposit flows and costs are likely to be a bigger factor this year, “as most banks experienced a third straight quarter of net deposit outflows.”

Amid the mixed trends, Fitch has a stable outlook on the U.S. banking sector, “which implies sufficient ratings headroom to absorb weaker financial conditions that are consistent with a moderate recession.”