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COMMENTS

Despite Declining Loss Provisions, U.S. Banks Still Face Asset Quality Risks And Low Interest Rates

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Securities Firms Should Benefit From Global Economic Recovery In 2021 As Risks Abound

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French Bank Outlook 2021: All About Efficiency And Asset Quality

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Bulletin: U.K. Bank Rating Actions Won’t Wait For The Bank of England’s 2021 Stress Test Results

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Despite Declining Loss Provisions, U.S. Banks Still Face Asset Quality Risks And Low Interest Rates

KEY TAKEAWAYS

  • U.S. banks reported significant improvements in third-quarter earnings, compared with the prior quarter, as they sharply reduced provisions for credit losses, held allowances roughly flat, and saw significant declines in consumer borrowers deferring loan payments.
  • While we are maintaining our base-case forecast for 3% aggregate pandemic-related loans losses, taken mostly in 2020 and 2021--pending further clarity on the economy, additional government stimulus, and vaccine development and distribution--we believe the probability of losses reaching that level have dropped somewhat.
  • At that loss rate, we would expect most rated banks to generate positive, but relatively weak, earnings over the next year, an important factor in the stable outlooks S&P Global Ratings has on many banks.
  • While lower provisions drove higher earnings in the quarter, low interest rates are weighing on net interest income and preprovision net revenue. Absent a rise in rates, banks would likely exit the pandemic with weaker profitability than they entered it.

U.S. banks' asset quality showed important signs of stabilizing in the third quarter as the economy rebounded briskly. The proportion of consumer loans on deferral fell sharply and the sharp rises in allowances for credit losses that characterized the first half of the year for most banks, stabilized. That allowed banks to report substantial rebounds in earnings from the prior quarter.

Whether the asset quality stability lasts will likely depend on how durable the economic rebound will be through 2021, the extent of further government stimulus, and the success of vaccine development and distribution.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least two experimental vaccines are highly effective are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Until we gain some further clarity, we are maintaining our base-case forecast for the U.S. banking system of 3% pandemic-related credit losses (see "What Lies Ahead For U.S. Bank Provisions For Loan Losses," Aug. 12, 2020). We would expect banks to take those aggregate losses mostly in 2020 and 2021. At the same time, we believe that the probability of losses reaching or exceeding 3% has dropped somewhat. At a 3% loss rate, U.S. banks (rated and unrated) in aggregate would likely only be about 40% finished with pandemic-related provisions, which they would probably take over the next year.

In that scenario, we believe rated banks, many of which would have to at least double the provisions they took in the first three quarters of 2020, would generally remain profitable over the next year, even if profits are weak. We would expect most to report low- to mid-single digit returns on equity. However, an expectation of continued profitability along with restrained capital payouts and solid liquidity owing to continued inflow of deposits, supports our stable outlooks on many banks.

At the same time, banks' ability to absorb additional losses through earning has notably declined as ultralow interest rates drive net interest income down and net interest margins (NIMs) to multi-decade lows, pressuring preprovision net revenue. A loss rate greater than 3% is more likely to cause significant bottom-line losses now than it would have when NIMs were much higher.

At current NIMs, banks are also likely to exit the pandemic with weaker profitability ratios than they entered it. For instance, we estimate the third quarter returns on common equity of banks that experienced declines in net interest income would have been roughly 160 basis points (bps) higher at the median had their net interest income been flat with the year ago period.

Our Expectations For Pandemic-Related Losses

We have set our base-case forecast for pandemic-related loan losses for Federal Deposit Insurance Corp. (FDIC)-insured banks in aggregate at about half of the 6.3% loss rate the Federal Reserve projects for the 33 banks included in the June 2020 Dodd-Frank Act Stress Test (DFAST).

A 3% loss rate would be much less severe than the loan losses from the 2008-2009 financial crisis. Banks reported provisions in excess of 5.5% of their loans in 2008 and 2009 collectively, and charged off more than 5% of loans in 2009 and 2010, and another 1.6% in 2011.

We consider our economists' forecast for 4.0% contraction in U.S. GDP this year and a 3.9% recovery next year. Whether the government extends further stimulus and the success in developing and distributing vaccines will also likely have material impacts on credit losses. Enhanced unemployment benefits and eviction protections have lapsed for many Americans. The stimulus provided to small- and medium-size businesses through the Paycheck Protection Program (PPP) has also ended. To date, Congressional Democrats and Republicans and President Donald Trump have not agreed on an additional stimulus bill.

We will update our 3% pandemic loss estimate as the path of economic growth and vaccine and stimulus efforts become clearer.

Chart 1

image

How Robust Are Allowances For Loan Losses?

The ratio of allowances for loan losses to loans for rated banks was 2.8% in aggregate and 1.7% at the median at the end of the third quarter. Those ratios did not change much from the prior quarter, but they were up sharply from 1.3% and 1.0% at yearend 2019.

The aggregate allowance far exceeds the median, in part, because of differences in loan mixes between the largest banks and the regional banks. Some of the large banks tend to have far greater proportions of credit card loans, which require higher allowances than most other types of loans.

While allowances have risen sharply this year, ratios of 2.8% and 1.7% at the aggregate and median would still not be high enough if our base-case loss projection of 3% were realized. That implies banks may be expecting lower losses than our 3% base case. To better gauge the robustness of allowances and make distinctions between banks, we look at not only allowances to total loans, but also the following measures:

  • Allowance by type of loan;
  • For banks that participated in the Fed's 2020 DFAST, allowance to the Fed's projection of loan losses in its severely adverse scenario;
  • For banks that did not participate in DFAST, allowance to a projection of loan losses made by applying the Fed's aggregate loss rates in DFAST to each bank's loan mix;
  • Allowance to the company's projection of loan losses (for banks required to perform a company-run version of DFAST); and
  • Capital plus the allowance relative to regulatory risk-weighted assets.

Looking at allowances relative to DFAST losses suggest large banks may have more aggressively added to their allowances than regional and small banks. Therefore, the 2.8% aggregate allowance for rated banks may exceed the 1.7% median not only because of loan mix (and greater credit card exposure), but because of greater conservatism. At the median, the allowances of DFAST banks (which are the country's largest banks) equated to 40% of DFAST loan losses in the third quarter, little changed from the prior quarter. The allowance of other rated banks equated to just 30% of their implied DFAST losses (based on their loans mixes).

Some regional and small banks with lower proportional allowance levels likely have lower-risk loans, such as First Republic Bank. Others hold a significant amount of loans that were marked as part of acquisitions, meaning those loans may require no allowance. The ratios of allowances to total loans (including acquired loans) for those banks, such as TCF Financial, First Horizon, and Truist, may be stronger than they appear.

Chart 2

image

Table 1

DFAST Banks: Allowances To Funded Loans And Leases, DFAST Loan Losses, And Capital
Third-quarter 2020, sorted by all/Fed DFAST loan losses
(%) ALL/Fed DFAST loan losses ALL/company DFAST loan losses ALL/loans CET 1 ratio CET1 capital + ALL/RWA
MEDIAN 39.8 53.1 2.3 11.7 13.1

State Street Corp.

11.2 44.7 0.5 12.4 12.6

Northern Trust Corp.

12.4 55.8 0.7 13.4 13.7

Morgan Stanley

17.2 32.6 0.6 16.9 17.2

Bank of New York Mellon Corp.

21.7 20.6 0.6 13.0 13.2

KeyCorp

33.9 NA 1.7 9.5 10.8

Fifth Third Bancorp

34.8 NA 2.3 10.1 12.0

M&T Bank Corp.

35.2 NA 1.8 9.8 11.5

Goldman Sachs Group Inc.

37.9 41.7 3.2 12.9 13.5

Citizens Financial Group Inc.

37.9 NA 2.0 9.8 11.6

Truist Financial Corp.

38.3 54.3 1.9 10.0 11.6

Capital One Financial Corp.

39.1 47.6 6.5 13.0 18.5

American Express Co.

40.5 NA 5.7 13.9 18.8

Wells Fargo & Co.

41.1 70.3 2.1 11.4 13.0

Bank of America Corp.

41.5 53.1 2.1 11.9 13.2

Ally Financial Inc.

41.7 NA 2.9 10.4 12.8

Regions Financial Corp.

42.9 NA 2.6 9.3 11.4

U.S. Bancorp

43.3 49.7 2.4 9.4 11.3

Huntington Bancshares Inc.

47.3 NA 2.2 9.9 11.9

PNC Financial Services Group Inc.

47.5 56.9 2.3 11.7 13.4

JPMorgan Chase & Co.

47.8 62.5 3.1 13.1 15.1

Discover Financial Services

50.5 NA 9.3 12.2 21.1

Citigroup Inc.

55.4 73.2 4.0 11.8 13.9
DFAST--Dodd-Frank Act Stress Test. CET1--Common equity Tier 1. RWA--Risk-weighted assets. N/A--Not applicable.

Table 2

Non-DFAST Banks: Allowances To Funded Loans And Leases, DFAST Loan Losses, And Capital
Third-quarter 2020, sorted by all/implied DFAST loan losses
(%) ALL/implied DFAST loan losses ALL/loans CET 1 ratio CET1 capital + ALL/RWA
MEDIAN 30.3 1.5 11.0 12.6

New York Community Bancorp Inc.

13.0 0.4 9.7 10.2

First Republic Bank

18.8 0.6 9.8 10.4

Valley National Bancorp

18.9 1.0 9.7 10.8

People's United Financial Inc.

20.0 0.9 9.9 10.9

Texas Capital Bancshares Inc.

20.1 1.2 9.1 10.0

UMB Financial Corp.

22.9 1.3 11.9 13.0

Trustmark Corp.

23.1 1.1 11.4 12.4

Cullen/Frost Bankers Inc.

24.5 1.4 12.7 13.8

Commerce Bancshares Inc.

24.7 1.4 13.3 14.6

First Commonwealth Financial Corp.

25.0 1.3 10.7 12.0

Synovus Financial Corp.

25.8 1.5 9.3 10.7

TCF Financial Corp.

27.4 1.5 11.5 12.9

F.N.B. Corp.

28.0 1.5 9.6 11.0

Comerica Inc.

28.2 1.9 10.3 11.7

SVB Financial Group

29.5 1.3 12.3 13.2

S&T Bancorp Inc.

30.0 1.6 10.7 12.8

BOK Financial Corp.

30.0 1.8 12.1 13.4

Zions Bancorporation N.A.

30.5 1.6 10.4 12.0

First Midwest Bancorp Inc.

31.4 1.6 10.0 11.5

BancorpSouth Bank

31.5 1.6 10.6 12.2

Umpqua Holdings Corp.

31.8 1.5 11.7 13.3

Associated Banc-Corp

33.2 1.5 10.2 11.7

East West Bancorp Inc.

34.0 1.7 12.8 14.5

Investors Bancorp Inc.

35.7 1.4 13.2 14.7

Webster Financial Corp.

35.7 1.7 11.2 12.9

Hancock Whitney Corp.

36.0 2.0 10.3 12.2

Cadence Bancorporation

46.8 2.9 12.0 14.6

First Horizon National Corp.

57.2 1.7 9.2 10.7

CIT Group Inc.

60.4 3.2 9.9 12.2

Popular Inc.

63.9 3.1 15.9 19.0

OFG Bancorp

71.2 3.5 12.6 16.0

Synchrony Financial

73.4 12.9 15.8 29.0

First BanCorp.

83.5 3.2 17.2 20.5

Sallie Mae Bank

114.1 7.4 12.7 19.5
DFAST--Dodd-Frank Act Stress Test. CET1--Common equity Tier 1. RWA--Risk-weighted assets. N/A--Not applicable. Notes: Implied DFAST losses are calculated by applying 50% of the aggregate loss rates per type of loan from 2020 DFAST to each bank's loan portfolio. See table 7 for further details. Our rating on First Horizon is unsolicited.

Table 3

Allowance To Loans By Type, Third-Quarter 2020
Based on call report data
(%) Construction Commercial real estate Residential real estate Commercial Credit cards Other consumer Total
MEDIAN 1.7 1.7 1.0 1.7 9.9 2.8 1.7

New York Community Bancorp Inc.

1.3 0.4 0.6 0.5 - 1.9 0.4

State Street Corp.

- 0.4 - 0.5 - 0.0 0.5

First Republic Bank

1.4 0.9 0.2 1.2 - 0.9 0.6

Northern Trust Corp.

1.7 1.9 0.8 0.4 - 0.4 0.7

People's United Financial Inc.

0.5 0.7 1.1 1.0 0.8 3.0 0.9

Valley National Bancorp

0.9 0.8 0.7 1.9 3.4 0.7 1.0

Bank of New York Mellon Corp.

11.8 3.7 2.8 0.2 - - 1.1

Trustmark Corp.

1.5 1.4 1.1 0.6 1.4 3.6 1.1

Texas Capital Bancshares Inc.

0.4 1.4 1.0 1.1 - - 1.2

UMB Financial Corp.

0.3 1.2 0.4 1.6 4.7 1.7 1.3

SVB Financial Group

0.3 1.2 1.5 1.3 0.4 2.9 1.3

Investors Bancorp Inc.

1.6 1.5 0.7 2.0 - 0.2 1.4

Commerce Bancshares Inc.

1.8 1.0 0.4 1.2 12.2 0.9 1.4

Cullen/Frost Bankers Inc.

1.4 1.8 0.8 1.4 - 1.5 1.4

F.N.B. Corp.

1.9 2.1 0.8 1.4 1.4 1.4 1.5

TCF Financial Corp.

4.8 1.6 1.2 1.3 - 1.8 1.5

Synovus Financial Corp.

3.0 0.8 1.9 1.3 11.8 2.7 1.5

Umpqua Holdings Corp.

3.1 1.1 0.7 2.5 - 3.4 1.5

Associated Banc-Corp

2.0 1.9 0.7 1.9 10.0 1.9 1.5

Zions Bancorporation N.A.

2.0 1.0 1.3 1.8 1.1 1.3 1.6

First Midwest Bancorp Inc.

1.2 1.4 1.1 2.0 5.0 4.3 1.6

BancorpSouth Bank

1.8 1.5 1.8 1.3 14.3 2.9 1.6

S&T Bancorp Inc.

1.5 2.4 1.0 0.9 - 2.8 1.6

East West Bancorp Inc.

1.6 1.5 0.4 2.9 - 0.3 1.7

First Horizon National Corp.

1.2 1.6 2.2 1.5 1.9 1.6 1.7

Webster Financial Corp.

1.4 2.7 1.0 1.7 - 5.2 1.7

KeyCorp

1.7 2.1 1.6 1.5 9.8 2.1 1.7

BOK Financial Corp.

0.0 1.6 2.2 1.9 - 0.7 1.8

M&T Bank Corp.

2.3 1.6 1.0 1.5 8.4 3.8 1.8

Truist Financial Corp.

1.9 1.4 1.4 1.4 6.7 3.5 1.8

Comerica Inc.

1.5 2.4 1.0 1.8 - 1.7 1.9

Hancock Whitney Corp.

2.7 2.7 2.0 1.4 5.2 2.3 2.0

Citizens Financial Group Inc.

5.4 1.9 0.8 1.8 9.9 2.8 2.0

Bank of America Corp.

6.5 3.3 0.3 1.5 11.2 1.0 2.1

Wells Fargo & Co.

2.2 2.2 0.6 2.2 11.3 3.6 2.2

Huntington Bancshares Inc.

8.8 3.6 0.8 2.6 11.0 1.7 2.2

PNC Financial Services Group Inc.

1.3 2.7 0.8 2.0 14.1 4.2 2.3

Fifth Third Bancorp

1.9 3.6 2.4 1.9 13.7 1.6 2.3

U.S. Bancorp

4.3 2.8 0.8 2.0 10.6 1.8 2.4

Regions Financial Corp.

1.4 3.6 1.4 2.2 11.2 7.2 2.6

Cadence Bancorporation

5.5 3.6 1.6 2.5 - 5.0 2.9

Ally Financial Inc.

1.3 1.5 0.2 0.7 - 4.7 2.9

Popular Inc.

1.3 2.7 2.9 2.1 5.3 5.2 3.2

First BanCorp.

5.6 2.7 3.6 1.4 7.7 4.2 3.2

JPMorgan Chase & Co.

5.0 1.7 1.3 2.0 12.8 2.0 3.2

CIT Group Inc.

3.0 3.1 2.2 4.0 - 11.1 3.3

OFG Bancorp

2.7 2.5 2.1 4.7 12.8 4.5 3.5

Citigroup Inc.

0.6 1.8 0.9 1.8 11.3 3.0 3.7

Capital One Financial Corp.

- - - 2.3 11.2 4.0 6.5

American Express Co.

- - - 14.3 6.4 6.8 6.6

Sallie Mae Bank

- - - - 11.5 7.4 7.4

Discover Financial Services

0.0 - 2.2 4.2 9.3 9.8 9.3

Synchrony Financial

- - - 5.3 13.7 7.3 13.4
Notes: All data is based on call report filings made by subsidiary banks because consolidated regulatory financial data was not yet available. Therefore, the allowance levels may differ slightly for the consolidated bank. Excludes Goldman Sachs and Morgan Stanley because they have significant allowances outside their subsidiary banks. Our rating on First Horizon is unsolicited.

What Do These Allowance Levels Say About Future Provisions?

As the extent of loan losses becomes clearer, banks will need to set provisions roughly equal to the sum of:

  • The excess of pandemic-related losses over current allowances; and
  • An amount to replenish their allowance--likely to a ratio of allowances to loans around where it was Jan. 1, 2020--as losses are absorbed.

If we assume the 22 banks part of DFAST (excluding 11 others with foreign parents) ultimately have losses equal to 50% of the Fed's projection in its severely adverse scenario, those banks would be slightly more than halfway finished with their provisions. (At the end of the second quarter, they were less than halfway finished by this calculation). Assuming a loss rate equal to 25% of the Fed's projection would mean these banks are essentially finished with provisions.

For banks not part of DFAST--who tend to have lower allowances--we believe they have further to go. Applying 50% of DFAST loan loss rates by type of loan to their portfolios implies they are less than 40% of the way done with provisioning (up from less than a third in the prior quarter). If we apply 25% of DFAST loan loss rates, these banks would be largely done with provisioning. Again, these numbers imply banks generally expect lower losses than we have incorporated in our base-case scenario. A handful of these banks released reserves in the third quarter.

Table 4

Allowance And Hypothetical Provisions Assuming 50% Of DFAST Severely Adverse Loan Losses
--DFAST banks-- --Non-DFAST banks--
Bil. $ Allowance/loans (%) Bil. $ Allowance/loans (%)
4Q allowance + day 1 CECL adjustment 102.2 1.67 19.6 2.05
3Q20 YTD provisions 102.0 12.3
3Q20 YTD net charge-offs (36.7) (5.6)
3Q20 allowance 167.5 2.81 26.3 2.51
50% of DFAST loan losses (less 3Q20 YTD net charge-offs) (156.2) (24.8)
Resulting allowance before provisions 11.4 0.19 1.5 0.22
Provisions needed to rebuild allowance 88.0 20.0
Final allowance after losses and provisions 99.3 1.67 21.5 2.05
3Q20 YTD provisions / Total provisions required (%) 54 38
DFAST--Dodd-Frank Act Stress Test. Notes: 3Q20 YTD net charge-offs estimated as the difference between the provisions and the change in allowance.

How Well-Positioned Are Banks To Absorb Future Provisions?

We believe most rated banks could generate enough preprovision net revenue to remain profitable over the next four quarters assuming:

  • Banks report enough additional provisions to cover 50% of the loan losses in DFAST (half of the Fed's projected amount for DFAST banks and half of the amounts implied by the Fed's aggregate loan loss rates for non-DFAST banks), and
  • PPNR remains steady at the third-quarter rate over the next four quarters.

We use a four-quarter period (through the third quarter of 2021) because the current expected credit losses accounting standard (CECL) should force banks to take provisions as their loss expectations evolve. However, there is a possibility banks could take pandemic-related provisions more gradually and beyond the next four quarters, making losses easier to absorb with earnings. That would occur if their expectations of rising losses build only gradually. Also, a significant portion of the actual charge-offs could occur later than the next four quarters. While we believe most banks would remain profitable for the period, they could take losses in any given quarter that has a disproportionate share of the remaining needed provisions.

Banks that have already built the largest allowances relative to potential losses will need the least PPNR to cover additional provisions. Banks with the strongest PPNR generation will be able to cover the greatest amount of additional provisions needed.

Although most banks would remain profitable in this scenario, many would have very thin earnings. Any shareholder payouts they make and balance sheet growth they experience would weigh on their capital ratios. The Fed's prohibition on repurchases and dividend increases for banks that were part of the stress test provides some support for capital ratios, at least through the end of the year. It also mandates that dividend payouts do no exceed the average of a bank's net income for the four preceding quarters.

Table 5

DFAST Banks: Third-Quarter PPNR (Annualized) Versus Remaining Provisions Assuming 50% Of DFAST Provisions
(Bil. $) 3Q PPNR annualized 50% of DFAST provision Provisions taken + day 1 CECL adjustment Implied provisions remaining Implied pretax income (next 12 months): annualized PPNR less provisions remaining Implied pretax income/assets (%)
MEDIAN 6.9 5.3 3.1 2.4 4.2

0.93

Capital One Financial Corp.

15.3 23.9 12.8 11.0 4.3 1.0

Ally Financial Inc.

3.1 5.1 2.7 2.4 0.7 0.4

Wells Fargo & Co.

18.6 26.5 13.0 13.5 5.1 0.3

Fifth Third Bancorp

2.9 4.3 1.8 2.5 0.4 0.2

M&T Bank Corp.

2.5 2.9 0.9 2.0 0.6 0.4

Citizens Financial Group Inc.

3.2 4.0 1.9 2.1 1.2 0.6

Northern Trust Corp.

1.6 1.1 0.1 1.0 0.6 0.4

KeyCorp

2.6 2.8 1.2 1.6 1.0 0.6

Truist Financial Corp.

8.6 9.7 5.3 4.4 4.3 0.9

Regions Financial Corp.

3.0 3.2 1.8 1.3 1.6 1.1

PNC Financial Services Group Inc.

7.0 6.6 3.8 2.8 4.2 0.9

Bank of America Corp.

23.7 26.6 14.2 12.3 11.4 0.4

Goldman Sachs Group Inc.

18.3 5.6 3.5 2.0 16.3 1.4

Huntington Bancshares Inc.

2.1 2.2 1.3 0.8 1.3 1.1

U.S. Bancorp

10.3 9.3 4.9 4.4 5.8 1.1

State Street Corp.

2.7 0.7 0.1 0.6 2.1 0.8

Bank of New York Mellon Corp.

4.7 0.9 0.3 0.6 4.0 0.9

Citigroup Inc.

25.1 25.0 21.4 3.6 21.5 1.0

JPMorgan Chase & Co.

49.1 36.2 23.6 12.6 36.5 1.1

Morgan Stanley

14.2 3.3 0.6 2.7 11.5 1.2

American Express Co.

8.2 9.7 5.7 4.0 4.2 2.2

Discover Financial Services

6.8 9.3 7.1 2.2 4.6 3.7
DFAST--Dodd-Frank Act Stress Test. PPNR--Prepovision net revenue. CECL--Current expected credit losses. Notes: PPNR is calculated as reported pretax income plus provisions. No further adjustments to PPNR were made except for one-time items reported by Truist (merger costs, charitable contributions, and gains on securities) and Wells Fargo (operating losses, restructuring charges, and gains on debt and equity securities).

Table 6

Non-DFAST Banks: Third-Quarter PPNR (Annualized) Versus Remaining Provisions Assuming 50% Of Implied DFAST Provisions
(Bil. $) 3Q PPNR annualized 50% of implied DFAST provision Provisions taken + day 1 CECL adjustment Implied provisions remaining Implied pretax income (next 12 months): Annualized PPNR less provisions remaining Pretax income/assets (%)
MEDIAN 0.5 0.8 0.2 0.4 0.1 0.34

Texas Capital Bancshares Inc.

0.5 0.8 0.2 0.6 (0.1) (0.24)

TCF Financial Corp.

0.2 1.1 0.5 0.6 (0.5) (0.96)

People's United Financial Inc.

0.7 1.2 0.2 1.0 (0.3) (0.49)

Comerica Inc.

1.1 2.0 0.6 1.4 (0.4) (0.42)

Valley National Bancorp

0.5 1.0 0.2 0.8 (0.3) (0.77)

New York Community Bancorp Inc.

0.5 0.8 0.1 0.8 (0.2) (0.41)

First Republic Bank

1.2 1.8 0.1 1.7 (0.5) (0.37)

First Midwest Bancorp Inc.

0.3 0.4 0.2 0.3 0.1 0.34

First Commonwealth Financial Corp.

0.1 0.2 0.0 0.2 (0.0) (0.10)

Zions Bancorporation N.A.

1.2 1.6 0.5 1.1 0.1 0.09

UMB Financial Corp.

0.3 0.5 0.1 0.4 (0.1) (0.24)

F.N.B. Corp.

0.5 0.8 0.2 0.5 (0.0) (0.06)

Investors Bancorp Inc.

0.3 0.5 0.1 0.4 (0.1) (0.40)

Trustmark Corp.

0.2 0.3 0.0 0.3 (0.1) (0.34)

Webster Financial Corp.

0.5 0.6 0.2 0.4 0.1 0.39

Synovus Financial Corp.

0.9 1.3 0.4 1.0 (0.1) (0.21)

CIT Group Inc.

0.7 1.1 1.0 0.1 0.6 0.98

First Horizon National Corp.

0.7 1.0 0.6 0.4 0.3 0.34

Cullen/Frost Bankers Inc.

0.5 0.6 0.2 0.4 0.1 0.28

East West Bancorp Inc.

1.0 1.0 0.3 0.7 0.3 0.50

Commerce Bancshares Inc.

0.7 0.5 0.1 0.4 0.3 0.82

BancorpSouth Bank

0.4 0.5 0.1 0.3 0.1 0.56

BOK Financial Corp.

0.8 0.8 0.3 0.5 0.3 0.60

Umpqua Holdings Corp.

0.5 0.6 0.3 0.4 0.2 0.58

S&T Bancorp Inc.

0.1 0.2 0.2 0.1 0.1 0.74

Popular Inc.

0.9 0.8 0.6 0.2 0.7 1.04

Hancock Whitney Corp.

0.4 0.7 0.6 0.1 0.3 0.87

SVB Financial Group

1.7 1.0 0.3 0.7 1.0 1.02

Cadence Bancorporation

0.4 0.5 0.4 0.1 0.2 1.35

First BanCorp.

0.3 0.3 0.3 0.0 0.3 1.51

OFG Bancorp

0.2 0.2 0.2 0.0 0.2 1.88

Associated Banc-Corp

0.4 0.7 0.3 0.4 (0.0) (0.03)

Sallie Mae Bank

0.9 0.9 1.6 (0.7) 1.6 5.23

Synchrony Financial

9.6 7.9 7.6 0.3 9.3 9.70
DFAST--Dodd-Frank Act Stress Test. Notes: PPNR is calculated as reported pretax income plus provisions. No further adjustments to PPNR were made except for one-time items reported by Associated (loss on prepayment of FHLB advances and restructuring charges), First Horizon (notable items), First Midwest (optimization costs), and TCF (merger costs). The implied provision is calculated by first applying 50% of the aggregate loss rates per type of loan from 2020 DFAST to each bank's loan portfolio to calculate implied loan losses. Table 7 provides further details on those aggregate loss rates. Second, the implied provision is assumed to be 114% of the implied loan losses, in line with the median ratio of provisions to loan losses in 2020 DFAST for banks with a U.S.-based parent. Our rating on First Horizon is unsolicited.

Table 7

Loan Loss Rates In DFAST Or Implied By DFAST
Bank % of loans

Ally Financial Inc.

6.4

American Express Co.

10.7

Associated Banc-Corp

4.8

BancorpSouth Bank

5.6

Bank of America Corp.

4.7

Bank of New York Mellon Corp.

2.7

BOK Financial Corp.

6.2

Cadence Bancorporation

6.2

Capital One Financial Corp.

15.5

CIT Group Inc.

5.2

Citigroup Inc.

6.7

Citizens Financial Group Inc.

5.6

Comerica Inc.

6.5

Commerce Bancshares Inc.

6.4

Cullen/Frost Bankers Inc.

7.0

Discover Financial Services

17.0

East West Bancorp Inc.

5.1

F.N.B. Corp.

5.6

Fifth Third Bancorp

6.8

First BanCorp.

5.1

First Commonwealth Financial Corp.

5.6

First Horizon National Corp.

5.2

First Midwest Bancorp Inc.

5.4

First Republic Bank

3.4

Goldman Sachs Group Inc.

8.1

Hancock Whitney Corp.

5.8

Huntington Bancshares Inc.

5.1

Investors Bancorp Inc.

3.8

JPMorgan Chase & Co.

6.6

KeyCorp

5.3

M&T Bank Corp.

5.5

Morgan Stanley

3.5

New York Community Bancorp Inc.

3.4

Northern Trust Corp.

5.7

OFG Bancorp

4.9

People's United Financial Inc.

4.8

PNC Financial Services Group Inc.

5.1

Popular Inc.

5.3

Regions Financial Corp.

6.3

S&T Bancorp Inc.

5.6

Sallie Mae Bank

6.5

State Street Corp.

4.5

SVB Financial Group

4.8

Synchrony Financial

16.8

Synovus Financial Corp.

6.1

TCF Financial Corp.

5.2

Texas Capital Bancshares Inc.

5.9

Truist Financial Corp.

5.1

Trustmark Corp.

5.5

U.S. Bancorp

5.8

UMB Financial Corp.

6.6

Umpqua Holdings Corp.

5.1

Valley National Bancorp

5.6

Webster Financial Corp.

5.0

Wells Fargo & Co.

4.9

Zions Bancorporation N.A.

5.6
DFAST--Dodd-Frank Act Stress Test. Notes: 1) For banks that were part of the Fed's 2020 DFAST, we use the Fed's loan loss rate. For banks not part of DFAST, we apply the loss rates per type of loan from 2020 DFAST to their first quarter 2020 loan portfolio. 2) We used the following loss rates per type loan for banks that were not part of 2020 DFAST: 1-4 family first-lien mortgages (1.5%), junior liens and HELOCs (3.1%), commercial and industrial (7.2%), credit card (17.1%), other consumer (6.5%), and other loans (3.6%). The 2020 DFAST results also showed a loss rate on commercial real estate loans of 6.3%. We instead applied loss rates on owner- and non-owner-occupied commercial real estate of 6.4%, multifamily of 2.5%, and construction 12.0%. 3) Our rating on First Horizon is unsolicited.

Low Rates Have Hurt The Earnings Capacity of U.S. Banks

We estimate that net interest income fell in the third quarter by a median 3% for rated U.S. banks compared with the same period last year, helping drive down preprovision net revenue (PPNR) by a median 5%. (Coupled with a 3% median rise in noninterest expenses, the fall in net interest income more than offset a 5% rise in noninterest income.)

A median drop in net interest margins of more than 50 bps from the prior year outweighed the positive effect of 8% loan growth and 13% asset growth on net interest income. Without such growth, net interest income would likely have fallen substantially further. In fact, banks that had little or negative loan growth and sharp declines in NIMs experienced double-digit declines in net interest income. The minority of banks that grew net interest income generally benefited from strong loan growth or were asset sensitive (probably with a significant portion of fixed rate assets).

The loans originated as part of the Paycheck Protection Program, which were material for some banks, appear to have had a small positive impact on net interest income, limited by the 1% yield on such loans.

For banks that heavily rely on net interest income, particularly regional banks, the drop in NIM can be especially painful. Most rated banks generate about two-thirds of their revenue from net interest income, although the largest banks, the trust banks, and some others have much lower reliance.

We believe the fall in net interest income and PPNR means the earnings capacity of U.S. banks has dropped relative to before the pandemic, even when neutralizing for differences in provisioning.

For instance, the following measure helps illustrate the impact of lower rates on banks' returns on average common equity (ROCE):

  • Year-over-year change in net interest income divided by average common equity, and

We annualize and tax adjust that ratio at a 20% rate.

For banks that had net interest income declines, the ratio implies the declines cost those banks roughly 160 bps of ROCE at the median. If their net interest income had held flat, their ROCEs would have been 160 bps higher.

This excludes the roughly 35% of rated banks that reported higher net interest income related primarily to strong asset growth or acquisitions. However, even most of those banks have been weakened by lower NIMs.

Table 8

Third-Quarter 2020 Year-Over-Year (Y/Y) Change In Net Interest Income And PPNR And Estimate Of Impact On ROCE
Sorted by Greatest Decline in PPNR
Bank Net interest income: Y/Y change, 3Q20Y (%) PPNR: Y/Y change, 3Q20Y (%) Impact of decline in net interest income on ROCE (tax-adjusted) (pct pts) Estimated 3Q20 ROCE w/ "normalized provision" (20% tax rate)
Median (2.4) (4.3) (1.6) 11.0
Comerica Inc. (21.8) (35.5) (5.5) 10.4
American Express Co. (14.9) (34.0) (5.3) 23.5
Synchrony Financial (21.2) (32.2) (26.2) 14.8
Wells Fargo & Co. (19.4) (26.9) (4.5) 7.9
Citigroup Inc. (8.2) (22.3) (1.8) 8.1
Bank of America Corp. (16.9) (22.3) (2.7) 6.6
Northern Trust Corp. (21.3) (22.2) (2.7) 11.9
Synovus Financial Corp. (6.2) (18.6) (1.8) 10.8
Texas Capital Bancshares Inc. (17.7) (17.9) (5.5) 10.5
First Midwest Bancorp Inc. (5.3) (17.3) (1.1) 7.8
Sallie Mae Bank (10.0) (17.2) (7.6) 32.6
East West Bancorp Inc. (12.4) (15.6) (2.9) 12.3
Webster Financial Corp. (8.8) (15.5) (2.2) 10.5
Associated Banc-Corp (11.7) (13.8) (2.1) 6.9
Fifth Third Bancorp (5.8) (10.4) (1.1) 9.7
OFG Bancorp 23.3 (9.1) NA-Pos Impact 8.2
Zions Bancorporation N.A. (2.1) (8.8) (0.5) 11.8
Cadence Bancorporation (3.8) (8.7) (1.0) 11.0
Bank of New York Mellon Corp. (3.7) (8.1) (0.2) 9.3
U.S. Bancorp (1.6) (6.7) (0.4) 15.1
Cullen/Frost Bankers Inc. (3.8) (6.4) (0.8) 8.8
M&T Bank Corp. (8.4) (6.3) (1.9) 12.9
Popular Inc. (3.3) (6.0) (1.0) 9.0
State Street Corp. (25.8) (5.8) (2.3) 9.5
KeyCorp 2.9 (5.6) NA-Pos Impact 11.3
JPMorgan Chase & Co. (8.5) (4.8) (1.6) 14.7
CIT Group Inc. (0.7) (4.7) (0.1) 8.7
Discover Financial Services (5.7) (4.7) (4.9) 37.8
F.N.B. Corp. (1.2) (3.9) (0.2) 7.6
First BanCorp. 3.0 (2.6) NA-Pos Impact 5.6
First Commonwealth Financial Corp. (3.0) (2.3) (0.6) 9.3
Hancock Whitney Corp. 5.5 1.4 NA-Pos Impact 10.2
Ally Financial Inc. (3.7) 2.1 (0.9) 12.4
S&T Bancorp Inc. 13.2 2.5 NA-Pos Impact 9.5
Huntington Bancshares Inc. 2.3 2.7 NA-Pos Impact 14.4
PNC Financial Services Group Inc. (0.8) 8.1 (0.1) 10.5
BOK Financial Corp. (2.6) 9.6 (0.5) 12.1
Citizens Financial Group Inc. (0.7) 12.6 (0.1) 11.0
Commerce Bancshares Inc. 6.1 13.8 NA-Pos Impact 15.5
People's United Financial Inc. 12.2 14.8 NA-Pos Impact 8.1
TCF Financial Corp. 1.4 16.4 NA-Pos Impact 8.5
Umpqua Holdings Corp. (5.4) 18.2 (1.6) 18.0
Regions Financial Corp. 5.4 19.7 NA-Pos Impact 13.1
New York Community Bancorp Inc. 19.5 22.0 NA-Pos Impact 8.1
UMB Financial Corp. 9.6 23.5 NA-Pos Impact 9.5
Capital One Financial Corp. (3.2) 24.5 (1.1) 13.8
Trustmark Corp. (2.1) 26.0 (0.4) 11.3
Morgan Stanley 22.0 29.4 NA-Pos Impact 14.4
First Republic Bank 19.5 29.6 NA-Pos Impact 13.1
BancorpSouth Bank 5.6 33.9 NA-Pos Impact 13.6
SVB Financial Group 1.4 38.2 NA-Pos Impact 25.9
Investors Bancorp Inc. 10.4 38.3 NA-Pos Impact 11.5
Valley National Bancorp 28.3 48.5 NA-Pos Impact 12.7
Goldman Sachs Group Inc. 7.5 69.1 NA-Pos Impact 18.0
Truist Financial Corp. 97.8 82.8 NA-Pos Impact 9.7
First Horizon National Corp. 76.9 202.9 NA-Pos Impact 21.4
Notes. 1. The changes in net interest income is based off of unadjusted figures. In some cases, mergers and other items materially impact that ratio. 2. The change in PPNR is based off of adjusted figures for either 3Q19 or 3Q20 for Associated, CIT, First Horizon, First Midwest, Hancock, TCF, Truist, and Wells Fargo. Adjustments were made for one-time items such as merger and restructuring costs and certain gains. 3. Estimated ROCE assumed a normalized provision equal to current loans multiplied by the average ratio of net charge-offs to loans for 2017 to 2019. 4. Our rating on First Horizon is unsolicited.

Table 9

Net Interest Income, Net Interest Margin, And Asset Growth
Sorted by greatest decline in net interest income
Bank Net interest income: Y/Y change, 3Q20Y (%) 3Q20 reported NIM (%) Change in NIM, Y/Y (pct pts) Loan growth, Y/Y (%) Asset growth, Y/Y (%) Net interest income/Revenue, 3Q20
Median (2.4) 2.88 (0.50) 8.5 12.9 64.8
State Street Corp. (25.8) 0.85 (0.57) 0.2 11.2 17.2
Comerica Inc. (21.8) 2.33 (1.19) 1.7 14.8 64.6
Northern Trust Corp. (21.3) 1.03 (0.58) 6.2 22.3 22.1
Synchrony Financial (21.2) 13.80 (2.49) (5.6) (9.7) 100.0
Wells Fargo & Co. (19.4) 2.13 (0.53) (3.6) (1.1) 52.2
Texas Capital Bancshares Inc. (17.7) 2.22 (0.94) 1.8 14.6 77.8
Bank of America Corp. (16.9) 1.72 (0.69) (1.8) 12.9 49.8
American Express Co. (14.9) 11.60 0.40 (21.3) (3.6) 21.4
East West Bancorp Inc. (12.4) 2.72 (0.87) 10.0 16.4 86.9
Associated Banc-Corp (11.7) 2.31 (0.50) 9.9 6.4 70.7
Sallie Mae Bank (10.0) 4.79 (0.76) 0.0 (1.7) 97.4
Webster Financial Corp. (8.8) 2.88 (0.61) 11.8 10.4 74.5
JPMorgan Chase & Co. (8.5) 1.82 (0.59) 1.0 17.4 45.4
M&T Bank Corp. (8.4) 2.95 (0.83) 9.6 10.5 64.6
Citigroup Inc. (8.2) 2.10 (0.50) (3.6) 10.9 62.5
Synovus Financial Corp. (6.2) 3.10 (0.59) 8.6 11.3 76.5
Fifth Third Bancorp (5.8) 2.58 (0.74) 1.2 18.1 63.7
Discover Financial Services (5.7) 10.19 (0.24) (4.1) 12.2 83.5
Umpqua Holdings Corp. (5.4) 3.08 (0.55) 4.2 1.8 63.2
First Midwest Bancorp Inc. (5.3) 2.95 (0.87) 14.7 17.1 77.9
Cadence Bancorporation (3.8) 3.49 (0.45) (1.3) 3.1 82.6
Cullen/Frost Bankers Inc. (3.8) 2.95 (0.81) 24.5 21.2 74.4
Ally Financial Inc. (3.7) 2.65 (0.05) (8.2) 2.1 55.0
Bank of New York Mellon Corp. (3.7) 0.79 (0.21) 1.1 14.8 18.3
Popular Inc. (3.3) 3.37 (1.08) 8.8 25.6 80.6
Capital One Financial Corp. (3.2) 5.68 (1.05) (0.5) 11.4 75.5
First Commonwealth Financial Corp. (3.0) 3.11 (0.65) 13.9 14.0 71.3
BOK Financial Corp. (2.6) 2.81 (0.20) 6.8 6.8 53.7
Zions Bancorporation N.A. (2.1) 3.06 (0.42) 12.1 11.4 78.4
Trustmark Corp. (2.1) 3.03 (0.63) 16.0 14.5 59.0
U.S. Bancorp (1.6) 2.67 (0.35) 4.2 10.8 54.4
F.N.B. Corp. (1.2) 2.79 (0.38) 11.4 9.1 73.2
PNC Financial Services Group Inc. (0.8) 2.39 (0.45) 5.0 12.9 58.5
Citizens Financial Group Inc. (0.7) 2.83 (0.29) 5.3 9.0 63.5
CIT Group Inc. (0.7) 2.27 (0.79) 19.1 18.4 43.2
SVB Financial Group 1.4 2.53 (0.81) 23.7 42.0 59.6
TCF Financial Corp. 1.4 3.34 (0.80) 2.5 4.1 76.4
Huntington Bancshares Inc. 2.3 2.96 (0.24) 8.4 10.5 65.5
KeyCorp 2.9 2.62 (0.38) 11.1 16.3 59.5
First BanCorp. 3.0 4.07 (0.99) 32.1 48.9 85.8
Regions Financial Corp. 5.4 3.13 (0.31) 6.7 13.3 61.9
Hancock Whitney Corp. 5.5 3.23 (0.18) 5.7 8.7 73.8
BancorpSouth Bank 5.6 3.31 (0.57) 8.5 18.7 66.2
Commerce Bancshares Inc. 6.1 2.97 (0.46) 13.5 21.6 62.5
Goldman Sachs Group Inc. 7.5 0.43 (0.01) 32.6 12.4 10.1
UMB Financial Corp. 9.6 2.73 (0.36) 22.3 25.3 62.1
Investors Bancorp Inc. 10.4 2.79 0.26 (3.5) (0.4) 90.2
People's United Financial Inc. 12.2 2.97 (0.15) 16.6 16.9 79.6
S&T Bancorp Inc. 13.2 3.29 (0.33) 19.4 21.4 81.3
First Republic Bank 19.5 2.71 (0.09) 21.4 20.0 82.9
New York Community Bancorp Inc. 19.5 2.29 0.30 4.9 4.6 95.3
Morgan Stanley 22.0 NA NA 14.0 5.9 12.7
OFG Bancorp 23.3 4.30 (1.28) 49.4 58.1 78.1
Valley National Bancorp 28.3 3.01 0.10 22.0 21.0 85.2
First Horizon National Corp. 76.9 2.84 (0.37) 91.0 89.9 64.8
Truist Financial Corp. 97.8 3.10 (0.27) 105.2 110.8 61.5
Note: Our rating on First Horizon is unsolicited.

This report does not constitute a rating action.

Primary Credit Analyst:Brendan Browne, CFA, New York + 1 (212) 438 7399;
brendan.browne@spglobal.com
Secondary Contacts:Stuart Plesser, New York (1) 212-438-6870;
stuart.plesser@spglobal.com
Devi Aurora, New York (1) 212-438-3055;
devi.aurora@spglobal.com

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