skyscrapers in Manhattan at sunset, New York City

Weak fourth quarter results for the big U.S. banks point to earnings challenges in the year ahead, says Fitch Ratings.

In a new report, the rating agency said that, among the big U.S. banks that have reported their results, pre-provision net revenue was down 37% in the fourth quarter, dragging full year growth down to just 6%.

“Large U.S. banks reported weak fourth quarter results driven by material one-time charges, capping a challenging year of fee income headwinds, rising funding costs, negative operating leverage and normalizing credit quality,” Fitch said.

On average, net interest income was down by 8% year over year, it reported. But these results varied widely based on business model differences.

While commercially focused regional banks faced double-digit drops in their net interest income, banks with big credit card and retail portfolios, such as JPMorgan Chase and Citigroup, held up better, it said.

Looking ahead, banks are anticipating continued declines in net interest income, “hampered by persistently slow loan growth, continued deposit repricing and expected rate cuts in the latter part of the year,” Fitch said.

Average net interest margins declined by six basis points in the fourth quarter, following a 7 basis point decline in the previous quarter, and a 16 basis point drop in the second quarter, it noted.

“Net interest margins appeared to have either reached or approached a floor across the group,” it said.

On the upside, the banks are expecting fee income to improve as the capital markets are responding positively to the belief that the rate cycle will be turning in the year ahead.

However, in the fourth quarter, non-interest income was flat, on average.

“The large trading banks again reported muted investment banking revenues during the quarter, rounding off an exceptionally poor year for these activities,” Fitch said.

“However, debt underwriting was a moderate bright spot, as revenues strengthened by approximately one-third on aggregate, while the picture for equity underwriting and M&A advisory was mixed across entities,” it added.

In the wealth and asset management segments, the banks’ results were also mixed, Fitch said.

While JP Morgan and Goldman Sachs posted healthy revenue increases, for many of their rivals, these revenues were flat or down modestly, it noted.

“However, client assets or assets under management were uniformly up, reflecting net new inflows and market appreciation,” it said.

At the same time, banks’ expenses were inflated in the fourth quarter, with hefty one-time charges for job cuts and to replenish the industry’s deposit insurance fund, Fitch reported.

“For the full year, expenses rose by more than 11% on average across the group. However, banks confidently pointed to expense stability in 2024, backed up by industry-wide job cuts,” it said.

Rising credit pressures in the consumer loan and office real estate segments also drove an increase in net charge-off ratios at most banks. Year over year, the median net charge-off ratio increased by 24 basis points, Fitch said.

In the year ahead, banks are expected to face “manageable levels of deterioration” in their credit quality, “including deterioration modestly beyond pre-pandemic levels for credit cards,” it noted.

“Importantly, banks’ loss-absorbing capacity remained historically strong, demonstrating readiness to manage an uncertain macroeconomic and regulatory environment,” Fitch said.

It expects banks to “continue to preserve capital given regulatory uncertainty pending finalization of proposed capital rules.”