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S&P: Political events and credit quality pose risks to banks in 2018

U.S. banks could benefit from deregulation and a more business-friendly tax code in 2018, but S&P Global Ratings warned that the outlook is clouded by concerns over political uncertainty and deteriorating credit quality.

In a presentation Dec. 14, S&P Global Ratings analysts said U.S. banks are widely expected to continue to improve profitability "moderately" in 2018, despite expectations for rising credit costs. But the outlook for credit quality is dim, as the analysts noted that 2018 could bring "deterioration" in auto, commercial real estate and credit card lending. S&P Global Ratings also expressed concern that gradual rate hikes from the Federal Reserve could decrease market valuations of other assets on banks' balance sheets, particularly forcing liabilities to reprice.

The analysts also cautioned that the unprecedented unwinding of the Fed's $4.5 trillion balance sheet could have "unintended consequences" and possibly introduce more volatility into the markets.

But banks can look forward to regulatory changes and tax reform in the new year.

Brendan Browne, a senior director for S&P Global Ratings, said the deregulatory proposals of the Republican-controlled White House and Congress present some "material" opportunities to change post-crisis rules concerning capital and liquidity requirements. Pointing to the uncertainty of legislative passage, Browne said "it's not clear how this is going to play out at all" but added that any changes would reduce regulations instead of adding more.

"The regulatory story has plateaued," Browne said.

On tax reform, S&P Global Ratings noted that a reduction in the corporate tax would benefit the banking industry, which tends to have a higher effective tax rate than other industries. The proposed tax bill has been reported as having a corporate tax rate of 21%.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.