The big Wall Street banks are reporting healthy third-quarter profits thanks to heightened market volatility and strong investment banking activity, but the sector’s outlook remains negative amid continued uncertainty, says Fitch Ratings.
In a new report, the rating agency noted that earnings at the big U.S. banks with large capital markets businesses were resilient in the third quarter — as capital markets benefited from ongoing volatility, and as securities issuance remained robust and advisory revenue rebounded, too.
The banks’ traditional retail and commercial lending business are under revenue pressure, Fitch said, amid rock-bottom interest rates.
Yet, that was offset by solid mortgage banking results in the third quarter, Fitch noted.
“As markets and mortgage-related revenue normalizes in the latter part of 2020 and into 2021, Fitch believes U.S. banks broadly will face a challenged earnings environment on a core, operating basis,” the report said.
The rating agency also said that almost all of the large U.S. banks reported an increase in non-performing loans in the third quarter.
“We expect credit loss content to be manageable in the context of earnings in the near term,” said Bain Rumohr, senior director at Fitch.
“However, a failure to contain the spread of the coronavirus over the next couple of quarters, coupled with a delay in further stimulus, may necessitate further reserve builds putting more pressure on earnings, and ultimately, ratings,” Rumohr added.
Despite the stronger earnings results, Fitch maintained a negative outlook on its portfolio of U.S. banks, citing persistent uncertainty.
On the upside, the agency said that the banks have continued to strengthen their regulatory capital ratios, as regulators prevented share buybacks and limited dividends during the crisis.
“We believe this ability to build capital in a relatively short period of time, all while increasing loan loss allowance coverage, could ultimately provide a catalyst to stabilize ratings over the longer term, if the economic environment returns to sustainable growth and the virus is contained effectively,” said Christopher Wolfe, managing director at Fitch.