Fitch: Asset Quality Gains Diminishing for U.S. Banks in 2014

Mon Jan 27, 2014 10:18am EST

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(The following statement was released by the rating agency) CHICAGO, January 27 (Fitch) Large U.S. banks’ financial results for the fourth quarter signal the start of a likely turn in net charge-offs (NCOs) and the long-running trend of moderating asset quality may come to an end in 2014, according to Fitch Ratings. Rising NCO levels, coupled with increases in quarterly provision expenses, will begin to reduce the favorable impact of loan loss reserve releases on bank earnings over upcoming quarters. For the first time in five quarters, large banks as a group reported a sequential increase (2%) in NCOs during fourth-quarter 2013. Recent NCO levels have remained well below ten-year industry averages, driven by particularly good asset quality trends for commercial and industrial (C&I) loans and credit cards. The ongoing housing market recovery could support further upside for legacy mortgage asset quality, but on balance we expect NCOs to continue their reversion to long-term averages throughout 2014. Large reserve releases again provided significant support for bank results in the fourth quarter, particularly among the largest institutions. Reserve releases accounted for 32% of reported pretax earnings for Bank of America, 17% for Citi and 16% for JP Morgan Chase. Among large regional banks, on the other hand, the contribution of reserve releases is far smaller. The average reserve release for large regional banks represented only 5% of reported pretax earnings in fourth-quarter 2013, excluding Regions Financial and Fifth Third Bancorp (whose results were affected by a restructuring of a C&I loan). In part, this reflects the fact that many of these institutions (unlike their larger competitors) have not made large credit card-related releases in recent quarters. Signs of a modest pick-up in loan growth during fourth-quarter 2013 also support our view that asset quality and reserve release patterns will likely begin to shift in 2014. Loan growth remains anemic, but growth rates ticked up quarter over quarter for the large banks reporting to date, driven primarily by higher volumes in C&I, commercial real estate, credit cards and auto loans. While the fall-off in mortgage refinancings during the second half of the year weighed on earnings, increased activity in the other loan categories helped drive somewhat better top-line results across the board last quarter. For a complete rundown on fourth-quarter operating trends for U.S. banks, see the special report “U.S. Banking Quarterly Comment: 4Q13,� dated Jan. 27, 2014, at www.fitchratings.com. Contact: Julie Solar Senior Director Financial Institutions +1-312-368-5472 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available on www.fitchratings.com RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. Applicable Criteria and Related Research: U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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