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Fitch: Fed pause is credit neutral for banks despite revenue pressures

The Federal Reserve's dovish tilt this year will likely put pressure on U.S. bank revenues, but the central bank's announcement should be credit neutral for banks overall, according to Fitch Ratings.

The Fed signaled March 20 that it may not raise rates again until 2020, a shift from the Fed's four rate hikes last year and its previous guidance that it would raise rates twice in 2019.

An extended Fed pause "will likely hamper margin expansion for most of the banking industry," Fitch analysts said in a news release, noting that loan spreads may narrow as banks continue competing to try to grow their loan volumes. Meanwhile, their current variable-rate loans will stop repricing upward, while banks' bond portfolios will see flatter reinvestment rates, Fitch wrote.

But on the positive side, the Fed's pause "could extend the period of benign credit quality," with borrowers getting some relief from rising debt service costs, the analysts wrote.

The Fed's tightening cycle has generally lifted bank margins, but those have increasingly come under pressure as banks' deposit costs continue ticking up. S&P Global Market Intelligence expects deposit costs to continue to rise even if the Fed backs away from further hikes, as awareness grows among consumers about the more attractive rates that some institutions are offering.

Banks that have been more aggressive in raising their deposit rates, particularly online and mobile lenders, should continue seeing deposits flow in as a result, the Fitch analysts wrote. But those whose rates have lagged behind and have lower deposit betas should see their costs go up as their rates "gradually catch up," they added.