NEW YORK–Profits at U.S. banks were down in the fourth quarter of 2019 due to lower interest margins, but overall credit remains solid, according to analysis released by Moody’s Investors Services. The analysis was released as part of the company report, "Banks – United States: Q4 2019 Update.”
Despite the sector's ongoing profitability headwinds, Moody's said return on average assets remained solid and other credit metrics remained supportive.
“Lower NIM drove declines in net interest income, making it very difficult to generate operating leverage in the quarter,” Moody’s said. “Nonetheless, the profitability of US banks remained solid in the quarter, with a median return on average assets (ROAA) of 1.15% for the group.”
Looking Forward
Looking ahead, Moody's said it sees continued pressure on NIM, which will limit banks' levers to support earnings in 2020.
"The Fed made three, 25-basis-point cuts to the Fed funds rate from July through October 2019. This reversed one third of the rate rises from the end of 2015 through the end of 2018," said Megan Fox, assistant vice president in Moody's Financial Institutions Group, in a statement. "The average NIM for this group of banks has now returned to early 2017 levels and we expect it will remain under pressure in 2020."
“Despite these pressures, US banks continued to benefit from low loan-loss provisions, with credit quality strong across most asset classes despite high private-sector debt,” Moody’s said. “With interest rates likely to remain low, NIM and net interest income are unlikely to increase without significant loan growth, which Moody's does not expect. Earning asset yields will continue to fall, but deposit costs should also have a downward bias. Cost-management can be a lever to maintain profitability, but operational efficiency gains will be difficult to achieve because of the priority on ongoing technology investments.”
Other Points Made
Other points made in the Moody’s analysis:
- Generally low asset risk was an ongoing bright spot, supported by a favorable operating environment.
- Total loan growth continued to track nominal GDP growth fairly closely, helping moderate overall asset risk. The pace of commercial and industrial (C&I) loan growth decelerated in the quarter and was more in line with nominal GDP, a positive.
- Meanwhile, banks continued to tighten underwriting standards for approving credit card and auto loan applications. Standards for residential mortgages were largely unchanged during the quarter and demand for consumer credit remained solid, Moody’s said.
- Median capitalization was stable at both regional banks and the U.S.-based global investment banks (GIBs). The rated US regional banks had a median Common Equity Tier 1 (CET1) capital ratio of 9.7% at 31 December 2019, and the U.S. GIBs a much higher median CET1 capital ratio of 12.4%, as of the same reporting date.
- Fourth-quarter results showed continued high shareholder distributions, which incorporated the banks' 2019 Comprehensive Capital Analysis and Review (CCAR) plans. Payouts continue to skew toward repurchases, which banks have been more willing to cut back than dividends in times of stress