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Moody’s: US banking system outlook remains stable amid solid fundamentals June 04, 2018 at 03:35PM

Moody’s: US banking system outlook remains stable amid solid fundamentals

 

Moody’s: US banking system outlook remains stable amid solid fundamentals

New York, June 04, 2018 — The outlook for the US banking system remains stable as favorable economic and employment conditions continue to support strong risk metrics across most asset classes over the next 12-18 months, Moody’s Investors Service says
in a new report. The outlook has been stable since May 2013.

“Bank profitability will benefit from lower corporate tax rates and improving net interest income,” Rita Sahu a Moody’s Vice President says.” The capitalization of US banks is sound, but could likely decline over
the outlook period. Additionally, rising interest rates may moderately reduce core deposit funding.”

Moody’s says the operating environment is stable and US bank’s credit performance should benefit from the favorable economy and low unemployment in 2019. Corporate debt to GDP has reached pre-crisis levels pointing
to a rise in commercial loan asset risk, but overall bank loan growth is back in line with GDP growth.

“Despite supportive US labor and housing markets, there are signs of asset quality deterioration in both the auto and credit card sectors, driven not by general consumer credit trends but rather weak underwriting,”
Sahu says. “In response to high delinquencies, banks with exposure to auto loans have reported tightening underwriting standards, and the larger auto lenders have begun to pull back from making new loans.”

However, credit card loans are still growing. Above average growth in card loans coupled with weakening underwriting may make the current plateau in charge-off rates unsustainable.

The capital levels of rated US banks are sound, largely because of more stringent regulation, but the metric is expected to decline gradually as banks increase shareholder payouts. US banks have sufficient capital
to absorb credit costs in an adverse economic scenario and will maintain a cushion above minimum capital ratios.

Profitability should gain traction for US banks amid rising interest rates, which will lift net interest margins (NIMs), as well as lower corporate taxes and improved operating leverage. Based on first quarter
data, the median effective tax rate for 1Q18 was 18.3%, almost one-quarter less than a year ago, a credit positive.

Moody’s expects the federal funds rate increase at the end of the first quarter will also boost US banks’ NIM. However, the improvement in NIM will be constrained by the continued increase in deposit betas, which
indicate greater price sensitivity among depositors that will drive up banks’ interest paid on deposits relative to interest earned.

There is no expectation to change the government support assumptions incorporated into banks’ debt and deposit ratings over the 12-18 month outlook horizon.

 

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