NEW YORK & CHICAGO--(BUSINESS WIRE)--Link to Fitch Ratings' Report: U.S. Banking Quarterly Comment: 1Q16 (Energy Drives Weaker Results)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880668
Weaker bank earnings in the first quarter were not a surprise given the macroeconomic backdrop that included fears of a global slowdown, negative interest rates in the US, energy-related concerns and a strong dollar, according to Fitch Ratings. The first-quarter 2016 results for the largest 17 US banks were lower from a year ago for 12 of the 17 banks.
Given the prolonged low interest rate environment and relatively weak economic trends, absolute earnings remain lackluster, with a return on assets (ROA), on average, of around 90 bps. Energy-related credit costs and market volatility primarily affected results. Offsetting these trends was some margin help from the December rate hike and generally lower expenses.
Weaker oil prices have affected provisioning despite prices rebounding from their lows in January. Continued price volatility is expected, and we still view weak energy prices as an earnings headwind and not a capital event for Fitch-rated banks, although the ultimate secondary effects are difficult to measure.
Given the macroeconomic environment, the number of future rate hikes is looking less certain, providing little uplift to bank earning this year. In December, the Federal Reserve's "dot plot" suggested four interest rate increases in 2016, while the recent March 2016 FOMC projections had the median Fed Funds rate at 0.875% at year-end 2016, implying just two increases. Some banks are now modeling just one rate hike during the year. In first-quarter 2016, there were increasing concerns of negative interest rates and the possibility that the Fed would have to backtrack from its December hike, although those conversations have slowed recently.
Additionally, capital markets results for the five large global trading and universal banks were down considerably versus a year ago, falling on average 22% from a solid first-quarter 2015. The first quarter is typically the strongest and tapers off throughout the year. Given good backlogs in investment banking cited at the large banks, investment banking revenues may improve over the course of the year, although markets-related activities may remain under pressure.
For more information, please see our special report titled "U.S. Banking Quarterly Comment: 1Q16; Energy Drives Weaker Results," dated April 2016, which is available on our website at www.fitchratings.com
Additional information is available on www.fitchratings.com.
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