January 23, 2024 (MLN): Large U.S. banks reported weak fourth-quarter results driven by material one-time charges, capping a challenging year of fee income headwinds, rising funding costs, negative operating leverage and normalizing credit quality, according to Fitch Ratings.

Aggregate 4Q23 pre-provision net revenue (PPNR) declined by 37% compared with 4Q22 across 17 large banks that have reported to date. However, full-year PPNR improved 6% compared with 2022.

As anticipated, banks took one-time charges during the fourth quarter related to the $16.3 billion FDIC special assessment to replenish the Deposit Insurance Fund, and widely took severance-related restructuring charges for staff reductions.

Notably, such non-recurring items triggered a quarterly net loss at two institutions.

Truist Financial Corporation’s (TFC) $5.2bn net loss reflected a $6.1bn goodwill impairment, plus FDIC assessment and restructuring charges.

Citigroup (Citi) took $4.7 billion in notable pre-tax charges, which included emerging market currency devaluation and transfer risk costs, producing a $1.8bn net loss for the quarter.

Across the group, non-recurring items reduced quarterly PPNR by approximately 50% on average.

Net interest income declined yoy by 8% on average but varied according to business models.

Banks with sizable card and retail portfolios, such as JPMorgan Chase (JPM) and Citi, bucked the trend, while commercially oriented regional banks (some of which strategically shrank their balance sheets) saw double-digit declines.

However, net interest margins (NIM) appeared to have either reached or approached a floor across the group.

Average NIM declined by 6 bps sequentially, compared with 7 bps in the prior quarter, and 16 bps in 2Q23.

Banks were guided to continued declines in net interest income, hampered by persistently slow loan growth, continued deposit repricing and expected rate cuts in the latter part of the year.

Positively, banks consistently noted improving conditions for fee income as capital markets responded to relative rate stability. However, on average, non-interest income for the fourth quarter was roughly flat yoy.

The large trading banks again reported muted investment banking revenues during the quarter, rounding off an exceptionally poor year for these activities (down on aggregate by approximately 10% relative to 2022, which was itself a relatively weak year).

However, debt underwriting was a moderate bright spot, as revenues strengthened by approximately one-third on aggregate, while the picture for equity underwriting and M&A advisory was mixed across entities.

Fourth quarter wealth and asset management revenues were also uneven among the largest banks, with JPM and Goldman Sachs (GS) posting healthy yoy revenue increases, while peer segments were flat or modestly down.

However, client assets or assets under management were uniformly up, reflecting net new inflows and market appreciation.

As noted, expenses were materially inflated during the quarter due to selected items. For the full year, expenses rose by more than 11% on average across the group. However, banks confidently pointed to expense stability in 2024 (ranging from modest declines to modest growth), backed up by industry-wide job cuts.

In terms of credit, net charge-off ratios continued to rise at most institutions, driven by consumer loans and office commercial real estate (CRE), with a median increase of 24 basis points yoy.

The largest increases were registered by consumer-focused lenders, Ally Financial and Discover Financial Services, as well as by more diversified lenders with large credit card books, such as JPM and Citi.

Banks continued to maintain elevated allowance coverage for the troubled office CRE sector and steadily brought down outstanding exposures.

Their 2024 credit outlooks largely cited manageable levels of deterioration, including deterioration modestly beyond pre-pandemic levels for credit cards.

Overall, banks’ base case for full year performance resonated with Fitch’s 2024 Outlook, which anticipated continued challenges for banks’ financial performance, including credit normalization, with potential upside related to expense efficiencies and a rebound in capital markets income.

Importantly, banks’ loss-absorbing capacity remained historically strong, demonstrating readiness to manage an uncertain macroeconomic and regulatory environment.

Average reserve coverage increased for the seventh consecutive quarter to 2.2%, which compared favorably with pre-pandemic levels (1.6% at 4Q19).

Similarly, common equity Tier 1 ratios remained consistently higher than historic levels, averaging 11.4% compared with 10.9% at YE2022 and 10.8% at YE2019.

Fitch expects banks to continue to preserve capital given regulatory uncertainty pending the finalization of proposed capital rules.

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Posted on: 2024-01-23T11:43:10+05:00