Daily News: October 8, 2013

Fitch: Large Regionals Well-Placed to Manage Banking Risks

Fitch Ratings said that good liquidity, improving capital and better asset quality are all contributing to stable credit profiles for the largest U.S. regional banks, despite a difficult operating and regulatory environment.

As a group, the 14 Fitch-rated large regionals are generally better positioned to thrive in the current environment than larger global trading institutions or smaller community banks.

Like other banks, the large regionals continue to face a tough industry outlook as a result of sluggish economic growth, high (and increasing) regulatory costs, and a still-unfavorable interest rate environment. However, earnings performance for the group continues to improve and results are now approaching or exceeding pre-crisis levels, Fitch said.

Large regional banks are not immune from the broader industry problem of net interest margin (NIM) compression. Deposit re-pricing opportunities are essentially exhausted, and asset yields are still under pressure.

The industry could begin to report some NIM expansion as interest rates rise. However, a more meaningful impact on earnings won’t be seen until short-term rates start to move higher, given banks’ exposure to floating-rate loans. With no significant moves at the short end of the curve expected for several quarters, NIMs are unlikely to improve much over the near term, and could worsen further, Fitch noted.

Asset quality for these banks continues to improve, though net charge-offs (NCOs) for residential mortgages remain stubbornly high and well above normalized historical levels. Future asset quality strengthening will require that improvements in loss performance on one to four family residential mortgages outpace any mean-reverting loss increases in other asset classes (particularly commercial and industrial loans, credit cards or auto loans), according to Fitch.

Fitch completed a peer review of large regional banks on Oct. 8. Rating actions taken presume that Congress will resolve the ongoing debt ceiling debate and avoid a U.S. government default. Failure to successfully resolve the debt ceiling issue will likely have meaningful ramifications for the economy and financial industry, though this is not explicitly incorporated into the ratings.