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Industry Report Card: Large U.S. Banks' Earnings Should Improve In 2021 While Profitability Will Lag Pre-Pandemic Levels

At the start of the coronavirus pandemic, U.S. GSIBs had robust capital and liquidity. And despite a tough year, they posted decent profitability while restrictions on shareholder payouts helped boost capital ratios. Liquidity improved, aided by deposit inflows on the heels of the Fed's massive quantitative easing. A large allowance build in the first half of the year, coupled with continued fiscal support, should keep the need for additional provisions below our original heightened expectations.

The U.S. global systemically important banks (GSIBs) are Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., and Wells Fargo & Co. (We also include Northern Trust Corp. as a GSIB, which is a peer of the trust banks--Bank of New York Mellon and State Street.) S&P Global Ratings' outlooks on all these banks--both at the holding companies and operating companies--are stable (see table 1).

GSIBs' full-year 2020 earnings were down by 20% compared with a strong 2019--largely because of higher credit provisions stemming from pandemic concerns. Indeed, credit provisions roughly doubled from 2019. Ultralow interest rates also weighed on earnings in 2020. Banks reported a median 7% decline in net interest income (NII) as growth in earning assets was no match for declining net interest margins (NIMs).

Positively, other fee revenue offset some of the impact of lower net interest income and higher provisions. For example, capital market performance was exceptional, with revenue up by double digits, supporting modest revenue growth at the median.

Separately, during 2020, COVID-19 accelerated banks' push into technology–-in particular, consumers' adoption of mobile banking picked up. Notably, banks reported quarter-over-quarter increases in both online and mobile banking users in the fourth quarter.

Table 1

U.S. GSIBs Ratings
Company Holding company rating ALAC uplift notches Operating company rating

Bank of America Corp.

A-/Stable/A-2 1 A+/Stable/A-1

Citigroup Inc.

BBB+/Stable/A-2 2 A+/Stable/A-1

JPMorgan Chase & Co.

A-/Stable/A-2 1 A+/Stable/A-1

Wells Fargo & Co.

BBB+/Stable/A-2 2 A+/Stable/A-1

Morgan Stanley

BBB+/Stable/A-2 2 A+/Stable/A-1

Goldman Sachs Group Inc.

BBB+/Stable/A-2 2 A+/Stable/A-1

Bank of New York Mellon Corp.

A/Stable/A-1 1 AA-/Stable/A-1+

State Street Corp.

A/Stable/A-1 1 AA-/Stable/A-1+

Northern Trust Corp.

A+/Stable/A-1 0 AA-/Stable/A-1+
Note: As of Feb. 11, 2021. ALAC--Additional loss-absorbing capacity.

Our Base-Case Expectations For 2021

Bank earnings will likely improve this year on lower credit loss provisions, although pandemic-related asset quality challenges and decades-low net interest margins will keep profitability ratios below 2019 levels. The pending $1.9 trillion stimulus bill, continued economic growth, and vaccine distribution should keep credit losses from rising as high as we had anticipated earlier in the pandemic. Still, if the economy performs poorly, borrowers who have exited forbearance may face new stress (see "U.S. Bank Outlook 2021: Picking Up The Pieces And Moving On," Jan. 13, 2021). On the flip side, the Biden Administration and a Democrat-controlled Congress may push for higher corporate taxes and tougher regulatory and legal enforcement, which could pose some profitability headwinds for banks.

Category S&P Global Ratings' outlook
Net interest income Ultralow interest rates coupled with tepid loan growth hurt spread income, with margins near multidecade lows in 2020. We believe NII likely bottomed out in 2020. Stabilizing NIM--due to a steepening yield curve and improving long-term interest rates--and moderating loan growth will likely aid NII in 2021.
Noninterest income Noninterest income will likely decline somewhat from the strong levels of 2020 as we expect capital markets will normalize. While low rates may continue to help mortgage activity, the associated revenues may not be quite as strong as they were in 2020. Asset and wealth management revenues will partly depend on asset valuations. We expect card income and service fees to improve modestly as a result of improved consumer spending.
Provision for loan losses We expect provisions to fall meaningfully from the higher levels of 2020, but to still be higher than 2019. If our base-case estimate for pandemic-related credit losses proves accurate, the GSIBs would have the majority of pandemic provisions behind them. If the economy performs better than our base case, allowance levels may shrink substantially.
Noninterest expense Expenses will remain in sharp focus. Banks will manage costs by redeploying personnel, consolidating branches, containing head count, and growing digitization, but rising servicing expenses will somewhat offset this. We expect positive operating leverage will remain a challenge for many banks.
Loans Loan growth remained tepid late in 2020 across most loan categories, partially as borrowers sought financing in robust capital markets. Banks are again increasing PPP lending following the passage of the December stimulus bill, and vaccine distribution and reopening of businesses may help spur growth in 2021. Still, we expect continued moderate loan growth, depending on the strength of the economic rebound.
Deposits Deposit growth will likely ease following outsize growth in 2020, driven largely by the rapid expansion of the Fed’s balance sheet. Still, extension of PPP program and passage of stimulus bill could present banks with excess liquidity, which will aid deposit growth in 2021.
Capital Banks have maintained or improved on the good regulatory capital ratios they entered the pandemic with, in part because of restrictions on payouts and a delay of the impact of CECL (current expected credit losses) regulation. However, ratios should decline somewhat as a result of the Fed’s easing of payout restrictions beginning in 2021.
Credit quality Although banks have seen drops in loans on forbearance, certain loan classes remain under asset quality pressure, and we expect pandemic-related charge-offs to rise toward 2% (taken cumulatively in 2020 and 2021). The strength of the economy and the effectiveness of government stimulus will greatly influence that ratio.
Trust banks We expect the major U.S. trust banks’ creditworthiness to remain resilient to the challenging economy and in line with their high ratings, given the companies’ low credit-risk balance sheets, good fee-based revenue, and adequate capital ratios. Although problem loans may rise for some of the trust banks, lending exposures are substantially lower than commercial banks’. Earnings power should continue to be satisfactory, although fee revenues are vulnerable to market valuation fluctuations. Sharply lower rates will cause money market fee waivers through 2021 and further pressure on NII in early 2021 because of lower securities reinvestment yields and large cash balances at the Fed. Despite the likely resumption of common share repurchases in the first quarter of 2021, capital ratios should remain solid.

Fourth-Quarter Earnings Continued To Improve On Lower Provisions

In the fourth quarter, the eight U.S. GSIBs' earnings were mixed compared with fourth-quarter 2019, with a little over half of the banks reporting higher income, largely because of capital market gains and reserve releases. Notably, all the GSIBs remained profitable. The median return on equity was 8.4% for the group. NII continued to strain earnings, with the median NII falling 16% (see table 2). Loan growth remained weak as a result of competition from the capital markets, tight underwriting standards, and limited demand in some loan classes. That said, some money center banks indicated that NII likely bottomed out in the fourth quarter.

Capital markets revenue continued to be a strong point for the banks engaged in this business line. Outside of capital markets, noninterest income was buttressed by higher mortgage banking revenues and asset management fees.

Table 2

Income Statement Trends
Year-over-year change
Net interest income (15.5) (11.3) (6.4) (17.2) 30.6 32.4 (16.6) (21.5) (20.5)
Noninterest income (2.7) (2.0) 12.0 (3.2) 24.9 16.2 (19.3) 0.2 3.5
Revenue (10.1) (9.4) 3.3 (9.7) 25.6 17.9 (19.6) (4.3) (1.7)
Noninterest expense 5.2 2.9 (1.7) 0.5 13.4 (18.8) (1.2) (6.0) 6.9
Provisions (94.3) (117.7) (202.3) (127.8) (91.2) (12.8) (400.0) (300.0) 150.0
Pretax earnings (25.1) 2.3 42.6 (8.3) 62.1 138.7 (50.4) 0.5 (21.6)
Net income (22.8) (6.6) 44.6 3.8 56.6 153.0 (49.3) 1.2 (35.0)
Net interest margin (bps) (64) (62) (58) (40) N.A. N.A. (37) (52) (54)
Quarter-over-quarter change
Net interest income 1.2 (0.5) 1.9 (1.0) 25.9 30.1 (3.3) 4.4 1.8
Noninterest income (3.5) (11.9) 1.7 (11.4) 15.7 6.5 2.6 4.8 2.7
Revenue (1.2) (4.8) 0.3 (5.0) 17.0 8.9 (0.1) 4.8 2.5
Noninterest expense (3.3) (2.9) (4.9) (3.4) 12.7 (4.4) 9.1 2.1 8.4
Provisions (96.2) (119.5) (1,318.8) (123.3) (95.5) 5.4 66.7 (300.0) (600.0)
Pretax earnings 34.6 47.5 29.2 15.3 27.0 28.9 (22.0) (5.9) (4.2)
Net income 17.3 52.6 29.8 53.6 25.8 34.9 (19.8) (3.7) (14.7)
Net interest margin (bps) (1) (4) (2) 0 N.A. N.A. (7) (1) 2
Fourth-quarter reported
Net interest margin 1.71 2.06 1.80 2.13 N.A. N.A. 0.72 0.84 1.05
Efficiency ratio 69.29 65.73 54.91 78.22 67.52 52.81 76.11 73.05 74.85
ROAA 0.78 0.81 1.43 0.66 1.32 1.57 0.69 0.78 0.67
ROAE 8.1 9.4 17.9 6.9 14.7 21.1 6.6 8.3 8.4
BAC--Bank of America Corp. C--Citigroup Inc. JPM--JPMorgan Chase & Co. WFC--Wells Fargo & Co. MS--Morgan Stanley. GS--Goldman Sachs Group Inc. BK--Bank of New York Mellon Corp. STT--State Street Corp. NTRS--Northern Trust Corp. N.A.--Not available. *Provisions represent provision for loan losses. (For other entities, provisions represent provision for credit losses.) Sources: S&P Global and S&P Global Market Intelligence.

Ultralow interest rates and lower-yielding assets growth have caused NIMs to fall precipitously since the start of the pandemic. Most GSIBs had NIM declines of more than 50 basis points (bps) compared with fourth-quarter 2019 (see table 3). That said, banks have started to use excess liquidity to help boost spread income. At the same time, a steepening yield curve due to improving long-term interest rates helped limit further NIM compression in the fourth quarter. As a result, the median NIM was almost flat compared with the prior quarter.

Table 3

Net Interest Income Drivers
--Cost of deposits-- --Cost of interest-bearing liabilities-- --Yield on earning assets-- --NIM--
(bps) Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y

Bank of America Corp.

(0.02) (0.55) (0.04) (0.95) (0.04) (1.34) (0.01) (0.64)

Citigroup Inc.

(0.06) (0.86) (0.07) (1.16) (0.09) (1.59) (0.03) (0.63)

JPMorgan Chase & Co.

(0.02) (0.62) (0.07) (0.99) (0.08) (1.38) (0.02) (0.58)

Wells Fargo & Co.

(0.06) (0.78) (0.06) (0.91) (0.04) (1.10) 0.00 (0.40)
Median (0.04) (0.70) (0.05) (0.93) (0.06) (1.24) (0.02) (0.56)
Q/Q--Quarter over quarter. Y/Y--Year over year. Source: Company reports.

Expense growth varied. Some banks had higher expenses, associated partly with increased capital markets activity. Others reported declines, likely related to cost control efforts, such as branch closures, some decline in pandemic-related expenses, and fewer one-off items. As such, median expenses were nearly flat compared with fourth-quarter 2019, while they improved from the previous quarter. With the pandemic accelerating digitization, and expense rationalization in focus, we expect expenses to stabilize in 2021. But, achieving positive operating leverage may be difficult.

Also buttressing the bottom line in the fourth quarter was a drop in credit provisions. Deferral rates continued to decline in the fourth quarter and an improved economic outlook in banks' CECL forecast, along with the rollout of the vaccine and additional stimulus, prompted some banks to even release reserves (see the credit section for more detail).

Notably, at the end of last year, S&P Global Ratings lowered its expected loan charge-off estimate for U.S. banks. We now look for pandemic-related cumulative charge-offs to reach roughly 2.2%, rather than our prior 3% estimate. That's about one-third the level the Fed forecasted in the severely adverse scenario of its June 2020 stress test. Most of those charge-offs will likely come to fruition in the second half of 2021 and into 2022. If our forecast proves roughly accurate, 2021 provisions should remain higher than they were in 2019. (For more, see "The Fed's Stress Test Results Open The Door For U.S. Banks To Increase Capital Returns In 2021" and "Despite Declining Loss Provisions, U.S. Banks Still Face Asset Quality Risks And Low Interest Rates.")

Capital Markets Were The Silver Lining Of GSIB Earnings In 2020

Capital markets revenue was a positive story last year, supported by significant government stimulus. High volumes and wide bid-ask spreads boosted both sales and trading, and investment banking revenues, while robust client activity was spurred on by high volatility and companies seeking to raise capital to fortify their balance sheets. This year, we expect capital market revenue to remain robust, particularly in advisory and equity underwriting, but fall considerably below 2020's elevated levels.

In the fourth quarter, the capital market revenues for Morgan Stanley, Goldman Sachs, Citigroup, JPMorgan, and Bank of America were solid but down from the outsize levels in the prior quarters as volumes, spread, and volatility continued to normalize. As a result, capital market revenues declined from the prior quarter yet were 23% higher than fourth-quarter 2019.

Within capital markets, trading revenues rose 19% compared with fourth-quarter 2019--FICC (fixed income, currencies, and commodities) increased 10% while equities rose 35% (see chart 1). Strong performance across spread products and commodities were partially offset by lower revenues in rates and currencies generally. Only Bank of America reported lower FICC revenues year over year as weaker trading performance in macro products and mortgages outweighed gains in credit. Equity trading revenues increased owing to solid cash and derivatives performance benefiting from strong client volumes and more favorable market conditions. Citigroup and JPMorgan reported a sequential drop in equity trading revenues.

Chart 1


Investment banking revenues were up 32% year over year in the fourth quarter, largely because of strong equity underwriting and advisory revenues, partly offset by lower debt underwriting revenues. Equity underwriting benefited from an increase in industrywide deal volumes--IPO issuances, blocks, and follow-on offerings--driven by a strong equity backdrop. Morgan Stanley and Goldman Sachs reported quarter-over-quarter growth given their leading market positions in equity underwriting. Debt underwriting revenues decreased both sequentially and year over year as a result of lower volumes, particularly in asset-backed underwriting. While investment-grade issuances eased, the leveraged finance market continued to recover. Advisory revenues rebounded sharply--by 91% quarter over quarter and 19% year over year--largely because of a spurt in M&A activity as companies began to shift their focus from day-to-day operations to more strategic and opportunistic thinking.

Beyond capital markets, mortgage banking activity was strong, as low rates continue to spur originations. Asset and wealth management fees benefited from higher client transactional activity, higher market valuations, and positive net flows, partly offset by margin compression. As a partial offset, GSIBs reported subdued income from cards and service charges because of lower card spending and client activity. However, cards and service charges will likely tick up as the impact of fee waivers begins to wane and consumer spending kicks in amid pent-up demand.

Credit Quality Concerns Ease

Asset quality trends for the money center banks in fourth-quarter 2020 remained fairly stable as most asset quality indicators held up well. Net charge-offs (NCOs) fell while nonperforming assets (NPAs) rose somewhat sequentially. Improved lending market conditions supported low commercial NCOs, while consumer NCOs benefited from loan deferrals and fiscal-support programs.

Most banks reported a decline in loan deferrals. A drop in deferral loans likely means loan losses will not rise as sharply as feared earlier in the pandemic. Still, commercial and industrial (C&I) and commercial real estate (CRE) loans are showing signs of stress, as reflected in increased criticized loans.

We believe forbearance efforts that banks implemented have largely been successful at forestalling asset quality issues. This is seen in a decline in the percentage of borrowers remaining in forbearance from the inception of the programs through the banks' fourth-quarter earnings. So far, delinquencies for GSIBs have remained benign. But once stimulus and deferral programs end, delinquencies and charge-offs will likely rise significantly. We expect charge-offs to pick up in the second half of the year and remain relatively high in the first half of 2022.

Table 4

Asset Quality
--Nonperforming assets*-- --Net charge-offs§-- --Reserves to loans-- --Reserve release (build)/pretax income--
Q4 2020 (%) Q/Q (bps) Y/Y (bps) Q4 2020 (%) Q/Q (bps) Y/Y (bps) Q4 2020 (%) Q/Q (bps) Y/Y (bps) Q4 2020 (%) Q/Q Change Y/Y Change

Bank of America Corp.

0.55 5 16 0.37 (2) (2) 2.01 (4) 106 13.53 23 13

Citigroup Inc.†‡

0.84 6 27 0.87 (25) (23) 3.69 (23) 188 31.69 32 35

JPMorgan Chase & Co.

1.08 (8) 57 0.42 (5) (18) 2.80 (32) 148 16.48 5 16

Wells Fargo & Co.‡

0.96 10 39 0.25 (3) (6) 2.00 (6) 104 23.11 26 20
*NPAs are reported nonperforming loans divided by total loans. §NCOs are total net charge-offs (annualized) divided by average loans. †Citigroup's Q4'20 average loans is the average of period end gross loans from Q4'20 and Q4'19. ‡For Citigroup and Wells Fargo, provision for credit losses is used to calculate reserve release (build) instead of provision for loan losses. Sources: Company reports and S&P Market Intelligence.

In the fourth quarter, all the money center banks had reserve releases--they were largely in commercial lending due to an improving economy and bank clients' ability to access the capital markets. Meanwhile, reserves in consumer lending--particularly cards--were mostly flat as banks remained cautious about the near term, especially with the unemployment rate still higher than pre-pandemic levels. Allowances will likely fall further as the odds of severe losses due to the coronavirus pandemic have dropped. Still,the allowance for credit losses in 2020 was higher than in 2019, in part because of CECL adoption early in 2020 and a rise in expected losses.

In response to potential erosion in asset quality, banks have been tightening lending standards since the start of the pandemic. In particular, in second-quarter 2020, C&I lending had tightened the most since 2008. According to the Federal Reserve's Senior Loan Officer Opinion Survey in January 2021, banks have largely maintained consistent lending standards across all categories compared with the prior quarter. Nonetheless, large banks will likely ease standards in 2021 given their strong credit quality and an expected increase in risk tolerance. Per the report, large banks expect loan demand to strengthen, though credit quality will likely deteriorate modestly (outside of large C&I loans).

The risk arising from leveraged lending at GSIBs remains manageable, in our view, though not insignificant. Leveraged loans are a small portion of GSIB-funded loans, but the banks bear the risks associated with syndicating these loans. Some banks also have portfolios of collateralized loan obligations, though these tend to be small and consist of highly rated tranches.

Balance Sheets Grew Modestly On The Back Of Liquid Asset Growth

The GSIBs' balance sheets grew modestly in the fourth quarter largely due to an increase in liquid assets and some loan growth (see table 4). The securities portfolios expanded as GSIBs redeployed excess cash to generate more spread income amid earnings pressures. Outside the sharp drawdowns earlier in the year, loan growth has generally been subdued for most banks. Banks reported declines in commercial loans, largely because of weakening demand and lower utilization amid strong capital markets and a weak economy. Residential real estate loans declined as prepayment rates remained elevated while credit card loans increased modestly on the back of improved consumer spending (see table 5).

Still, consumers may continue to pay down mortgage or limit credit card debt, and commercial borrowers may avoid drawing more on banks lines until the pandemic abates and the economy strengthens. Nevertheless, banks are again increasing Paycheck Protection Program (PPP) lending following the passage of the December stimulus bill even as vaccine distribution and reopening of businesses may spur demand.

Table 5

Balance Sheet Trends
--Assets-- --Loans*-- --Deposits-- --Equity--
(%) Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y

Bank of America Corp.

3.0 15.8 (2.9) (5.7) 5.4 25.1 1.2 2.9

Citigroup Inc.

1.2 15.8 1.3 (3.4) 1.4 19.6 2.5 2.9

JPMorgan Chase & Co.

4.3 26.0 1.6 (2.1) 7.1 37.2 3.4 6.4

Wells Fargo & Co.

1.7 1.4 (3.5) (7.8) 1.5 6.2 2.3 (1.1)

Morgan Stanley§

16.7 24.6 4.6 13.9 29.9 63.3 15.9 26.8

Goldman Sachs Group Inc.§

2.7 17.1 3.7 6.5 (0.5) 36.8 4.0 7.2

Bank of New York Mellon Corp.

9.6 23.1 1.8 2.8 15.3 31.6 2.2 8.7

State Street Corp.§

15.7 28.1 3.4 6.0 21.4 31.8 2.8 10.5

Northern Trust Corp.§

11.8 24.2 3.1 7.2 17.4 31.9 1.0 10.0
Median 4.3 23.1 1.8 2.8 7.1 31.8 2.5 7.2
*Loans held for investment. §Includes loans held for investment (net of allowance), and loans held for sale. Q/Q--Quarter over quarter. Y/Y--Year over year. Sources: S&P Global Ratings and S&P Global Market Intelligence.

Table 6

Loan Growth
--Total loans-- --Consumer mortgages-- --Credit cards-- --Other consumer-- --Total consumer-- --Commercial--
(%) Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y Q/Q Y/Y

Bank of America Corp.

(2.9) (5.7) (4.2) (6.7) (1.4) (19.4) 1.7 0.5 (2.5) (7.9) (3.2) (3.6)

Citigroup Inc.

1.3 (3.4) 0.5 0.4 4.4 (12.6) 4.7 2.0 3.1 (6.7) 0.0 (0.7)

JPMorgan Chase & Co.

1.6 (2.1) (3.1) (2.3) 2.8 (15.1) 5.2 18.0 0.2 (4.0) 2.8 (0.4)

Wells Fargo & Co.

(3.5) (7.8) (6.3) (7.2) 1.8 (10.6) (11.1) (11.7) (6.5) (8.4) (0.8) (7.2)
Median (0.8) (4.5) (3.6) (4.5) 2.3 (13.8) 3.2 1.3 (1.2) (7.3) (0.4) (2.2)
Q/Q--Quarter over quarter. Y/Y--Year over year. Source: Company reports.

The Fed's balance sheet expansion has been a boon to bank deposits. Deposit growth outpaced loan growth in the fourth quarter even though the deposit growth rate slowed from the outsize levels of the first half of the year. Part of the reason for this was the reversal of commercial line draws and a slowdown in the growth of the Fed's balance sheet. We expect GSIB funding to remain strong, particularly as a result of the recently passed stimulus bill and the extension of PPP program.

Banks tried to alleviate NIM pressure by decreasing their reliance on higher-cost deposits and borrowings, a trend that will likely persist while deposits remain abundant. As such, deposit costs have continued to fall and the share of non-interest-bearing deposits remains elevated (see chart 2).

Chart 2


Liquidity remained robust last year given that the GSIBs were the primary beneficiaries of the influx of deposits and cash balances since the start of the pandemic. Continued strong deposit growth against waning loan growth meant most banks were flush with excess cash. Banks expanded their investment securities portfolio, which further buttressed liquidity. The Fed's accommodative monetary policy and management teams' conservative risk postures continue to fortify GSIB liquidity. Bank managements have been conservative in their risk positions in part because of more sophisticated contingency funding planning and liquidity risk management, as well as the need to meet regulatory benchmarks, such as the liquidity coverage ratio.

GSIBs' regulatory capital ratios rose further in the fourth quarter as the Fed's prohibition on share repurchases and dividend increases aided capital retention (see table 6). Decent profitability and the regulators' approval to delay the impact of CECL on regulatory capital ratios have supported those ratios. In addition, the easing loan growth has limited risk weighted asset expansion.

Nevertheless, we believe the regulatory capital ratios may have peaked in the fourth quarter as the Fed lifted restrictions on shareholder payouts after it released the results of its December 2020 stress test. This should allow GSIBs to lower their capital ratios, which generally are well above regulatory minimums. However, the ability to lower capital ratios further will hinge, in part, on the Fed's stance regarding capital return in the second quarter, the performance of the banks in the June 2021 stress test, and whether the Fed decides to alter the stress capital buffer (SCB) requirements based on the December stress test. In addition, some banks may be constrained from a supplementary leverage ratio standpoint, particularly if the Fed opts not to extend the exclusion of Treasuries and cash at the central bank from the calculation.

Table 7

Common Equity Tier 1 (CET1) Ratio--Basel III Fully Phased-In
--Q4 2020-- --Q3 2020-- --Quarter-over-quarter change (bps)-- Advanced/standardized (lower of the two) Q4 2020 Stressed capital buffer§ Proposed standardized CET1 minimum Current CET1 surplus (deficit) over (under) proposed minimum
(%) Standardized Advanced Standardized Advanced Standardized Advanced

Bank of America Corp.

11.9 12.9 11.9 12.7 0.0 20.0 S 2.5 9.5 2.4

Bank of New York Mellon Corp.

13.4 13.1 13.5 13.0 (10.0) 10.0 A 2.5 8.5 4.9

Citigroup Inc.*

12.2 11.8 12.1 11.8 10.0 0.0 A 2.5 10.0 2.2

Goldman Sachs Group Inc.

14.7 13.4 14.5 12.9 20.0 50.0 A 6.6 13.6 1.1

JPMorgan Chase & Co.

13.1 13.8 13.1 13.8 0.0 0.0 S 3.3 11.3 1.8

Morgan Stanley

17.4 17.7 17.4 16.9 0.0 80.0 S 5.7 13.2 4.2

Northern Trust Corp.

12.8 13.4 13.4 13.9 (60.0) (50.0) S 2.5 7.0 5.8

State Street Corp.

12.3 13.1 12.4 12.8 (10.0) 30.0 S 2.5 8.0 4.3

Wells Fargo & Co.

11.6 11.9 11.4 11.5 20.0 40.0 S 2.5 9.0 2.6
*Citigroup's standardized CET1 calculated from company reports. §Stressed capital buffers (SCB) from 2020 DFAST results. SCB effective Oct. 1, 2020. Sources: Company reports, S&P Global Ratings, the Federal Reserve Board, and regulatory filings.

The Fed conducted a second stress test in December 2020 to gauge how U.S. banks would perform if COVID-19 resulted in worsening economic conditions than it had originally assumed in its June stress test. The results showed that the large banks are well-positioned to maintain capital levels above the minimum under two hypothetical scenarios. The results were more benign than the dire possibilities presented in June's additional scenarios (see "The Fed's Latest Stress Test Points To Limited Bank Capital Returns," July 1, 2020). As a result, the Fed is now allowing the banks to repurchase a limited amount of shares in the first quarter, based on their recent income (see "The Fed's Stress Test Results Open The Door For U.S. Banks To Increase Capital Returns In 2021," Dec. 22, 2020).

For now, the Fed has decided not to use the December stress test results to recalibrate the SCB, which could result in a reduction in minimum capital requirement for some banks, based on their better performance in December's test. The current SCBs--which are a minimum of 2.5% and are set based on the performance in the June stress test--replaced the 2.5% capital conservation buffers in the standardized regulatory capital ratio requirements.

Trust Banks' Earnings Held Up Despite Low Rates

Profitability of U.S. trust banks (Bank of New York Mellon, State Street, and Northern Trust) was strained by low interest rates but overall held up well in the fourth quarter. Importantly, the trust banks' predominant source of revenue--asset servicing fees--benefited from favorable market values, inflows, and net new business that aided average assets under custody and administration and AUM.

Although NII tends to be approximately one-quarter or less of total revenue for the trust banks, its sharp decline has still dented profitability because of lower reinvestment yields in the trust banks' large securities portfolios as well as excess cash balances. We expect NII to continue to decrease in the first quarter of 2021. Lower rates are also causing the trust banks to have lower revenue in their cash management businesses because of money market fee waivers, and these fee waivers rose in the fourth quarter. As a partial offset, each of the trust banks is highly focused on cost controls to support earnings.

Overall, we expect the trust banks to continue to post pretax operating margins of at least mid-20%, which is satisfactory for the ratings.

Trust banks' balance sheets continued to be bloated by excess deposits, and deposits rose even further in the fourth quarter, reflecting the typical year-end rise from institutional clients accentuated by the excess liquidity in the monetary system. We expect the trust banks to continue to hold substantial assets in cash equivalents that should provide ample liquidity to address an eventual outflow of excess deposits.

Trust banks' overall asset quality remained good, partly because these companies have much lower loan credit risk than commercial banks. While Bank of New York Mellon and Northern Trust increased their loan-loss provisions in the first half of 2020 to build reserves, provision expenses were negligible in the third and fourth quarters. We think that any provisions in coming quarters will not significantly harm otherwise solid fee-based profitability.

Regulatory risk-adjusted capital ratios remained high for the three banks as of year-end 2020 as a result of earnings retention and the suspension of common share repurchases over the past three quarters. Otherwise, the Tier 1 leverage ratios continue to be restricted by the larger balance sheets from the deposits and corresponding cash surge. Given the regulatory approval on share repurchases, we think the trust banks will resume buybacks in the first quarter of 2021. Still, we expect the risk-based capital ratios among the trust banks to remain at solid levels.

This report does not constitute a rating action.

Primary Credit Analyst:Stuart Plesser, New York + 1 (212) 438 6870;
Secondary Contacts:Devi Aurora, New York + 1 (212) 438 3055;
Brendan Browne, CFA, New York + 1 (212) 438 7399;
Rian M Pressman, CFA, New York + 1 (212) 438 2574;
Barbara Duberstein, New York + 1 (212) 438 5656;
Research Contributor:Srivikram Hariharan, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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