U.S. Bank Earnings Pressured by Higher Deposit Costs, Reserve Building

U.S. bank earnings for 4Q22 declined YoY as banks continued to build loan loss reserves, driven by strong loan growth, normalizing credit losses and a weaker economic outlook that reflects higher levels of unemployment, according to Fitch Ratings.

Partially offsetting higher loss provisions in 4Q22 was exceptionally strong net interest income growth and net interest margin expansion, with many banks experiencing YoY double-digit loan growth, but these trends are expected to moderate in 2023. Consumer credit performance, while still better than pre-pandemic levels for most banks, began to normalize at a faster pace in 4Q22, particularly in credit card and auto loans.

Continued market volatility drove YoY growth in bank trading revenues, but had the opposite effect on investment banking (IB) activity which declined 53% on average relative to 4Q21. However, given the sharp decline in IB activity last year and barring a deep recession, strong pipelines and pent up demand could support a moderate recovery in 2023. Trading revenues remained strong YoY in 4Q22, particularly in FICC, although down QoQ when interest rate volatility drove considerable strength in FICC.

Deposit flows and deposit costs are likely to garner more focus this year, as most banks experienced a third straight quarter of net deposit outflows. While liquidity remains strong for the U.S. banking industry, loan to deposit ratios rose off of multi-decade lows in 2022, which should continue this year.

Recent trends are consistent with Fitch’s stable rating outlook for the U.S. banks sector in 2023, which implies sufficient ratings headroom to absorb weaker financial conditions that are consistent with a moderate recession.

Additionally, this quarter’s results and outlooks from bank management teams are generally consistent with Fitch’s “deteriorating” fundamental outlook for U.S. banks in 2023 relative to 2022, which assumes a moderation in loan NII growth, significant increases in loan loss provisions, stable capital ratios, and normalization of credit performance and loan to deposit ratios.
Source: Fitch Ratings