November 28, 2023 (MLN): Many large developed-market banks’ net interest margins (NIMs) are likely to have peaked in 2023 after NIM and loan growth supported profitability in 1HCY23, Fitch Ratings highlighted in their most recent update.

NIMs are under pressure from higher deposit pass-through rates and wholesale funding costs. The entity expects higher impaired loans in 2024, but no big rise in loan impairment charges (LICs).

Fitch’s latest analysis of 100 of the largest debt-issuing developed-market banks (DM100) shows strong revenue growth in 1HCY23 (average: 19%, annualized; 2022: 10%), driven by continued growth in net interest income (19%, annualized, on average).

Fee income picked up (5%, annualized) after remaining overall flat in 2022, and other income also supported revenue growth (average: 34%, annualized, after declining in 2022).

Overall, net interest income contributed 61% of DM100 banks’ revenue in 1HCY23 (2022: 59%).

NIMs rose by 20bp to 2.2% in 1HCY23, on average, with European non-G-SIBs (global systemically important banks) having the highest increases (about +40bp).

“We expect NIMs to have peaked already in many countries, including Australia, the UK, and the US, but to slightly widen in Japan in 2H23,” it added.

Some banking groups in Canada and the US had already recorded an NIM decline in 1HCY23.

French banking groups’ average NIM declined in 1HCY23, driven by a fast increase in regulated savings rates, while long-term fixed-rate loans will take longer to benefit from higher rates.

The entity expects margin pressure in French retail banking to reduce after 1HCY24.

Fitch Ratings expects higher interest rates to continue to spread through loan and investment portfolios, with less support from loan growth, which we expect to moderate (+5%, annualized, in 1HCY23).

Moreover, the deposit pass-through rates are also likely to increase as depositors look for better remuneration and more sight deposits to move to term deposits.

Customer deposits declined at North American DM100 banks in 1HCY23 but continued to grow elsewhere.

Operating costs (+5%, annualized) grew more slowly than revenue in 1HCY23, which drove a material improvement in cost/income ratios (average: 56%; 2022: 64%). Pre-impairment profits grew by 23% as a result.

LICs are likely to continue to increase towards pre-pandemic levels in 2H23. They averaged 45bp in 1HCY23, materially up from 34bp in 2022, the highest increases being at North American banks, particularly US consumer banks (+140bp).

However, the increased provisioning is mainly based on expected, rather than actual, losses as impaired loans were stable at 1.5%, on average, for DM100 banks at end-1HCY23. There were no significant changes in Stage 2 loan ratios for banks publishing this information.

Higher LICs did not prevent operating profits from growing strongly in 1HCY23 (average: 27%, annualized), particularly at non-G-SIB European banks (+55%), while large non-G-SIB US banks posted a decline (-17%). The average return on equity was also up at 13% for DM100 banks (2022: 11%).

Average common equity Tier 1 capital ratios remained strong at 14.2% at end-1HCY23 (+10bp) and average leverage ratios also increased by 10bp to 6.3%.

“We expect DM100 banks to continue to accumulate capital ahead of the implementation of the final Basel III rules, which will result in significantly higher capital requirements in Europe and the US,” it further added.

Anticipated is a further decline in liquidity coverage ratios, moving closer to pre-pandemic levels, with an average of 155% expected by the end of the 1HCY23.

However, these ratios are likely to remain well above regulatory minimums.

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Posted on: 2023-11-28T11:44:07+05:00