A new report from Fitch Ratings found U.S. bank earnings in the fourth quarter of 2022 declined year-over-year as banks continued to build loan loss reserves, driven by strong loan growth, normalizing credit losses, and a weaker economic outlook.
Partially offsetting higher loss provisions in the fourth quarter was strong net interest income growth and net interest margin expansion, with many banks experiencing year-over-year double-digit loan growth. Those trends are expected to moderate through 2023, according to Fitch.
Consumer credit performance, while still better than pre-pandemic levels for most banks, began to normalize at a faster pace in the fourth quarter, particularly in credit card and auto loans.
“Continued market volatility drove year-over-year growth in bank trading revenues but had the opposite effect on investment banking (IB) activity which declined 53 percent on average relative to fourth quarter 2021,” Fitch reported. “However, given the sharp decline in IB activity last year and barring a deep recession, strong pipelines and pent-up demand could support a moderate recovery in 2023. Trading revenues remained strong year-over-year in the fourth quarter, particularly in [fixed income instruments, currencies, and commodities] (FICC), although down quarter-over-quarter when interest rate volatility drove considerable strength in FICC.”
The Fitch report added: “Deposit flows and deposit costs are likely to garner more focus this year, as most banks experienced a third straight quarter of net deposit outflows. While liquidity remains strong for the U.S. banking industry, loan to deposit ratios rose off of multi-decade lows in 2022, which should continue this year.”
Fitch concluded that the fourth quarter 2022 results and outlook remained consistent with its “deteriorating” fundamental outlook for U.S. banks in 2023.