Earnings results for U.S. banks were higher across the board in second quarter 2016 (2Q16); however, this improvement is unlikely to carry over into the second half of the year, according to the U.S Banking Quarterly Comment from Fitch Ratings, which reviews the largest 17 U.S. banks.
“U.S. Banks will not see material improvement in earnings over the near term due to the lower-for-longer interest rate environment, modest economic growth expectations, global and political uncertainties, and higher future credit costs,” said Julie Solar, senior director, Fitch Ratings.
Stronger trading results and higher mortgage production income contributed to increased noninterest income growth in 1Q16, which boosted overall earnings for most banks. Large mortgage originators all reported growth in originations and applications, due to a seasonally stronger buying season and low interest rates.
Oil and gas portfolios stabilized somewhat this quarter for banks with energy exposure largely due to improving capital markets, higher oil prices, and lower balances following the spring borrowing-base redeterminations. Many banks also reported a sequential decline in total energy exposure.
“While there was stabilization in energy books during the quarter, this may be short-lived depending on future oil prices. We also expect some deterioration in non-energy loan losses from unsustainably low levels,” added Solar. In aggregate, loan growth in the quarter remains modest, growing less than 2%.
Commercial Real Estate loans are gaining steam, however, for certain banks including Citizens Financial Group, JP Morgan and PNC Bank. Commercial lending remains muted and some banks said commercial clients appear reluctant to borrow given the economic and political uncertainties. Most banks remain wary of multifamily lending.
Overall, capital ratios increased for U.S. banks due to earnings growth and modest balance sheet growth. Morgan Stanley reported the highest CET1 ratio of 15.8%. In this year’s Fed Stress Tests, the 33 participating banks fared surprisingly well, with generally higher starting and ending capital ratios.