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Industry Report Card: Large U.S. Banks' Profitability Should Rise Despite Limited Reserve Releases

(The U.S. 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.)

The eight U.S. GSIBs reported higher earnings in the third-quarter of 2021 compared with the year before driven by continued reserve releases, strong capital markets, and modest NII growth. NII grew by 2% year over year due to higher loan balances and improving yields, which were partly offset by Paycheck Protection Program (PPP) loan forgiveness (see table 1). As such, the median return on equity was 11.2% for the group in the quarter, supporting our ratings on the GSIBs. We believe GSIBs' earnings will only modestly improve because gains from reserve releases will moderate, making year-over-year comparisons difficult.

Money center banks reported growth in net interest Margins (NIMs) sequentially, a first since the start of the pandemic, largely because of their continued deployment of excess liquidity and partially because of growth in higher-yielding assets. Still, ultralow interest rates weighed on NIMs on a year-over-year basis, with the median NIM for money center banks down 12 bps from third-quarter 2020 (see table 2). Still, we believe NII will likely improve due to modest loan growth and a steepening of the yield curve.

Table 1

Income Statement Trends
(%) BAC C JPM WFC MS GS BK STT NTRS
(Year-over-year change)
Net interest income 9.5 (1.6) 0.5 (5.0) 38.8 44.3 (8.8) 1.9 5.4
Noninterest income 14.4 12.5 7.6 (2.8) 24.0 24.2 8.0 8.6 11.3
Revenue 11.9 (1.3) 1.3 (2.5) 25.9 26.2 4.9 7.4 10.0
Noninterest expense 0.3 3.5 1.1 (10.1) 20.0 4.4 8.8 0.5 7.4
Provision for credit losses (144.9) (109.2) (349.9) (281.4) (78.4) (37.1) (600.0) N.A (2,700.0)
Pretax earnings 96.9 48.3 19.9 108.7 39.8 59.2 0.4 28.6 32.9
Net income 63.5 53.0 24.6 65.0 38.0 63.4 0.7 34.0 36.9
Net interest margin (bps) (4) (11) (20) (10) N.A. N.A. (11) (9) (5)
(Quarter-over-quarter change)
Net interest income 8.4 2.0 2.7 1.2 10.6 (4.0) (0.6) 4.3 3.2
Noninterest income 3.9 2.8 (5.4) 1.7 (1.6) (12.5) 2.4 (0.4) 3.4
Revenue 6.1 (1.7) (2.7) (7.1) (0.0) (11.6) 1.9 (1.5) 3.4
Noninterest expense (4.0) 2.7 (3.4) (2.2) (3.1) (20.8) 5.0 (0.1) 0.7
Provision for credit losses (61.5) (80.2) (33.2) (10.7) (67.1) 290.2 47.7 86.7 (51.9)
Pretax earnings 11.3 (20.2) (6.5) (15.4) 6.7 0.0 (8.4) (6.6) 6.5
Net income (19.0) (26.2) (2.3) (16.6) 5.2 (1.2) (11.0) (4.8) 4.5
Net interest margin (bps) 7 2 0 1 N.A. N.A. 1 5 1
(Third-quarter reported)
Net interest margin 1.68 1.99 1.62 2.03 N.A. N.A. 0.68 0.76 0.98
Efficiency ratio 63.43 67.63 57.55 69.30 66.96 49.72 72.32 70.17 69.08
ROAA 1.00 0.80 1.25 1.11 1.27 1.53 0.84 0.98 1.01
ROAE 11.2 9.2 16.2 11.1 14.5 22.5 8.5 11.1 13.4
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. Source: Company filings, S&P Global Ratings and S&P Cap IQ Pro.

Table 2

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.

0.00 (0.04) 0.01 (0.06) 0.07 (0.09) 0.07 (0.04)

Citigroup Inc.

0.01 (0.12) (0.01) (0.15) 0.01 (0.22) 0.01 (0.10)

JPMorgan Chase & Co.

0.00 (0.04) 0.00 (0.08) 0.01 (0.25) 0.00 (0.20)

Wells Fargo & Co.

0.00 (0.09) 0.01 (0.14) 0.01 (0.21) 0.01 (0.10)
Median 0.00 (0.07) 0.01 (0.10) 0.04 (0.20) 0.03 (0.12)
Q/Q--Quarter over quarter. Y/Y--Year over year. NIM -- Net Interest Margin. Source: Company reports.

Expense trends varied. Some banks had higher expenses, associated partly with higher variable expenses as a result of higher revenue. Others reported declines, largely related to cost control efforts, such as branch closures, some decline in pandemic-related expenses, and fewer one-off items. Overall, median expenses were up modestly compared with third-quarter 2020, while they improved from the previous quarter. With the pandemic accelerating digitization and expense rationalization in focus, we expect expenses to stabilize over the next few quarters absent any material events.

Surge In M&A Activity Upheld Strong Capital Market Performance

In the third quarter, the capital market revenues for Morgan Stanley, Goldman Sachs, Citigroup, JPMorgan, and Bank of America were up 2% from the prior quarter and 18% from the prior-year quarter. The banks benefited from a surge in mergers and acquisitions (M&A) even as volumes, spread, and volatility continued to normalize from the outsize levels in the prior year.

Chart 1

image

Within capital markets, trading revenues increased 5% compared with third-quarter 2020 as equity trading grew 35%. Excellent performance in derivatives as well as strong performance in prime and cash from strong client volumes and more favorable market conditions contributed to the increase. Fixed income, currencies, and commodities revenue was down by 12% because of tough year-over-year comparisons, declines in rates, credit, and mortgages given the lower bid-offer spreads and volatility as well as tighter credit spreads, which more than offset strength in commodities and currencies.

Investment banking fees were up 54% year over year in the third quarter primarily from exceptional advisory performance and modestly higher underwriting revenues. Advisory revenues nearly doubled year over year because of a higher number of completed transactions amid a spurt in M&A activity. Relative to the prior-year quarter, equity underwriting benefitted from an increase in deal volumes in traditional IPOs and blocks driven by higher issuances and a conducive market. Higher leveraged finance issuance--aided by an active acquisition finance market that outpaced investment-grade issuance--pushed up debt underwriting revenues. However, underwriting revenues were down sequentially from a strong second quarter.

Beyond capital markets, banks saw increases in asset and wealth management fees, asset servicing fees, and service charges/card fees relative to the prior quarter. Mortgage banking activity remains robust as low rates continue to spur originations, though narrower gain-on-sale margins pressured origination fees. Asset and wealth management fees benefited from higher client transactional activity, higher market valuations, and positive net flows, partly offset by margin compression. While income from cards increased as a result of improved consumer spending, service charges improved as the pandemic-related fee waivers roll off and consumer transactions make strides.

Credit Quality Metrics Are Unsustainably Strong And Will Likely Normalize Over Time

Both net charge-offs (NCOs) and nonperforming assets (NPAs) fell further sequentially. Robust economic growth spurred in part by significant government stimulus measures and an accommodative monetary policy contributed to the decline. In fact, some GSIBs reported their lowest NCO rate in recent history. Improved lending market conditions supported low commercial NCOs while consumer NCOs benefited from elevated cash buffers from fiscal-support programs and loan deferrals.

Table 3

Asset Quality
--Nonperforming assets*-- --Net charge-offs§-- --Reserves to loans-- --Reserve release (build)/pretax income--
Q3'21 (%) Q/Q (bps) Y/Y (bps) Q3'21 (%) Q/Q (bps) Y/Y (bps) Q3'21 (%) Q/Q (bps) Y/Y (bps) Q3'21 (%) Q/Q change Y/Y change

Bank of America Corp.

0.52 (3) 2 0.20 (6) (20) 1.40 (12) (64) 12.15 (15) 21

Citigroup Inc.†

0.59 (5) (20) 0.56 (21) (56) 2.63 (18) (130) 20.04 (13) 30

JPMorgan Chase & Co.

0.85 (9) (31) 0.20 (9) (28) 1.74 (14) (138) 14.53 (5) 10

Wells Fargo & Co.

0.81 (5) (6) 0.12 (5) (17) 1.52 (20) (54) 23.88 4 26
*NPAs are reported nonperforming loans divided by total loans. §NCOs are total net charge-offs (annualized) divided by average loans. †Citigroup's Q3'21 average loans is the average of period end gross loans from Q3'21 and Q2'21. Sources: Company reports and S&P Market Intelligence.

Money center banks reported decreases in criticized loans though pockets of risk within commercial and industrial (C&I) and commercial real estate (CRE) persist. Delinquencies remained well controlled given the steady drop in the percentage of borrowers remaining in forbearance. Deferral rates declined further suggesting the pipeline for loan losses may not rise as sharply as feared earlier in the pandemic, which prompted GSIBs to release more reserves in the third quarter of 2021.

Consequently, GSIBs reported provisions for credit losses of roughly negative $20 billion in the first nine months of 2021, resulting in a lower reserve coverage ratio. All the money center banks posted reserve releases--split fairly evenly between consumer and commercial portfolios. As a result, the median ratio of reserves to loans for the money center banks fell to about 1.6% in the third quarter from 2.4% at year-end 2020. Money center banks probably still have some room to reduce their ratios of reserves to loans, which are above pre-pandemic levels, but the decline should be more gradual going forward.

While pandemic-related asset quality risks have declined considerably, other risks have risen. For instance, the strength of the economic rebound and the accommodative monetary policy have resulted in a booming leveraged loan market and a sharp rise in asset prices, including in residential real estate. Leveraged loan origination volumes have surpassed even the strong pre-pandemic levels this year, with borrowers on average taking on higher leverage. We view the associated risks as manageable but not insignificant for banks. Banks still bear the risk associated with syndication, among other areas. The threat of persistent inflation and the Fed's reaction to it--possibly a need to pare back liquidity in a more rapid manner--is another risk the banks face.

Balance Sheets Expanded Though Fed's Tapering Could Slow Growth

The GSIBs' balance sheets grew modestly in the third quarter mostly because of continued albeit more modest growth in deposits and modest loan growth (see table 4). Specifically, liquid assets have grown to represent a meaningful portion of balance sheets as GSIBs continue to ramp up their securities portfolios by redeploying excess cash to generate more spread income. While loan growth has been relatively soft, banks pointed to green shoots later in the quarter. That said, GSIBs' balance sheet growth will likely moderate further as the Federal Reserve begins tapering later this year.

Table 4

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.

1.8 12.7 1.1 (2.3) 2.9 15.4 (1.8) 1.5

Citigroup Inc.

1.5 5.7 (1.8) 0.2 2.8 6.7 (0.7) 4.0

JPMorgan Chase & Co.

2.0 15.8 0.1 5.3 4.2 20.0 0.7 5.9

Wells Fargo & Co.

0.5 1.8 1.1 (6.1) 2.1 6.3 (1.0) 5.6

Morgan Stanley

2.5 24.5 3.9 21.5 2.7 37.5 (1.0) 23.0

Goldman Sachs Group Inc.

4.0 27.5 9.8 27.2 8.8 27.5 3.9 18.3

Bank of New York Mellon Corp.

0.8 9.8 1.2 15.9 1.3 15.8 (4.1) (3.3)

State Street Corp.*

(1.0) 18.8 6.8 21.3 (1.7) 31.3 9.3 9.8

Northern Trust Corp.*

(1.9) 11.2 5.5 20.4 (2.9) 15.8 0.7 3.0
Median 1.5 12.7 1.2 15.9 2.7 15.8 (0.7) 5.6
*Includes loans held for investment (net of allowance), and loans held for sale. Q/Q--Quarter over quarter. Y/Y--Year over year. Source: Company reports, S&P Global Ratings and S&P Cap IQ Pro.

In terms of loan growth, there were some positive signs. For example, commercial loans were up modestly due to higher utilization rates. And banks reported strong loan pipelines and growth in unfunded commitments, particularly in commercial real estate (CRE), as banks continue to recover from pandemic-related credit pullbacks. Although certain segments of CRE lending could be hampered by structural constraints (less demand for office space), multifamily lending seems to be on the rise, as elevated housing prices are spurring demand for rental options instead of home purchases. That said, PPP forgiveness weighed somewhat on loan growth.

On the consumer side, there is some pressure on residential real estate loan growth but only modestly. Some banks reported that originations outpaced prepayments in the third quarter. Although banks reported softened loan demand due to the Delta variant late in the quarter, credit card loans generally grew with increased credit spending while customer payments appear to be leveling off. Auto lending benefitted from pent-up demand for vehicles given that the move out of urban centers has become a new structural reality. Now that stimulus has expired, consumers will likely need to increase borrowing as their liquidity subsides. We believe auto lending trends will remain strong as well as installment loans and point-of-sale financing.

Table 5

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.

1.1 (2.3) 0.5 (8.7) 1.7 (3.7) 3.8 15.7 1.5 (2.6) 0.7 (2.2)

Citigroup Inc.

(1.8) 0.2 (8.0) (11.7) (1.6) (2.3) (4.1) 4.5 (4.1) (4.3) (0.1) 3.5

JPMorgan Chase & Co.

0.1 5.3 0.1 (4.8) 1.0 2.0 (4.2) (2.6) (0.8) (2.1) 0.8 11.3

Wells Fargo & Co.

1.1 (6.1) (1.3) (17.2) 3.2 0.1 5.1 (0.9) 0.3 (13.0) 1.8 0.5
Median 0.6 (1.1) (0.6) (10.2) 1.3 (1.1) (0.1) 1.8 (0.2) (3.4) 0.7 2.0
Q/Q--Quarter over quarter. Y/Y--Year over year. Source: Company reports.

Deposits grew in the third quarter, but growth decelerated as government stimulus measures started to expire. The Fed's tapering and improved consumer spending should keep deposit growth in check going forward.

GSIBs continue to alleviate NIM pressure by decreasing their reliance on higher-cost deposits and borrowings, a trend that will likely persist as long as deposits as a percentage of loans stay at attractive levels. While the share of non-interest-bearing deposits remains elevated, we believe the deposit costs would likely have bottomed out in the third quarter (see chart 2). Of note, GSIBs' balance sheets are bit more asset sensitive now than at the start of the pandemic given that most of the deposit growth has happened at low rates, meaning these deposits will benefit from any potential increase in rates.

Chart 2

image

Because of the additional deposit growth, GSIBs further fortified their liquidity in the third quarter.

Capital Ratios Down Amid Accelerated Shareholder Payouts

GSIBs' regulatory capital ratios were down modestly in the third-quarter 2021--with some banks reporting even sharper declines--as improved profitability was more than offset by accelerated share repurchases (the Fed eased restrictions on share repurchases starting in the first-quarter 2021) and in part due to higher risk-weighted assets because of modest loan growth.

Table 6

Common Equity Tier 1 (CET1) Ratio--Basel III Fully Phased-In
Q3 2021 Q2 2021 Quarter-over-quarter change (bps)
(%) Standardized Advanced Standardized Advanced Standardized Advanced Advanced/ standardized (lower of the two) Q3 2021 Stressed capital buffer* Proposed Standardized CET1 minimum Current CET1 surplus (deficit) over (under) proposed minimum

Bank of America Corp.

11.1 12.6 11.5 13.0 (40) (40) S 2.5 9.5 1.6

Citigroup Inc.

11.7 11.8 11.8 12.0 (10) (20) S 3.0 10.5 1.2

JPMorgan Chase & Co.

12.9 13.6 13.1 13.8 (20) (20) S 3.2 11.2 1.7

Wells Fargo & Co.

11.6 12.4 12.1 12.7 (50) (30) S 3.1 9.6 2.0

Morgan Stanley

16.0 17.2 16.6 17.7 (60) (50) S 5.7 13.2 2.8

Goldman Sachs Group Inc. (The)

14.1 13.9 14.4 13.4 (30) 50 A 6.4 13.4 0.7

Bank of New York Mellon Corp.

11.7 11.8 12.6 12.7 (90) (90) S 2.5 8.5 3.2

State Street Corp.

13.5 13.8 11.2 11.8 230 200 S 2.5 8.0 5.5

Northern Trust Corp.

11.9 13.0 12.0 13.1 (10) (10) S 2.5 7.0 4.9
*Stressed capital buffers (SCB) from June 2021 DFAST results. New SCB effective Oct. 1, 2021. Source: Company reports, S&P Global Ratings, the Federal Reserve Board, and S&P Cap IQ Pro.

Some GSIBs are facing greater capital constraints on a non-risk-weighted basis than on a risk-weighted basis as a result of sharp balance-sheet growth--either the supplementary leverage ratio (SLR) or Tier 1 leverage ratio. While the GSIBs are not in danger of imminently breaching capital requirements, further balance sheet growth could force some to deploy various strategies to maintain buffers above minimums. At the same time, any potential changes to the calculation of the SLR, while currently uncertain, could provide relief. We don't expect these regulatory capital constraints to result in rating changes, but the challenge of complying with the non-risk-based capital requirements could lead to higher double leverage or affect companies' strategies (see "U.S. Banks' Growing Balance Sheets May Pose Regulatory Capital Constraints," published Oct. 11, 2021).

Separately, the GSIB buffer, which is incorporated in banks' minimum required capital levels, may rise for some banks starting in 2023. Specifically, based on year-end 2020 data, the GSIB buffers for Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan, and State Street may increase by 50 bps if they aren't able to reduce their balance sheets in time. Wells Fargo's GSIB buffer is due to decline by 50 bps.

Finally, the standardized approach for counterparty credit risk (SA-CCR) will go into effect in January 2022. This could pressure the capital ratios for those GSIBs that have high exposure to derivatives. For example, Morgan Stanley announced that it will adapt to SA-CCR early in the fourth quarter and estimated a 120 bps negative impact to its regulatory ratio (excluding mitigation efforts) as a result.

Higher Market Values And New Business Boosted Trust Banks' Earnings

Profitability of U.S. trust banks (Bank of New York Mellon, State Street, and Northern Trust) in the third quarter continued to be solid and within our expectations for these banks' high ratings. The trust banks' predominant source of revenue--asset servicing fees--benefited from favorable market values, net new business, and inflows that aided average assets under custody and administration and assets under management. Each bank posted pre-tax operating margins in the area of 29%-30%, well above the mid-20% range that we consider as satisfactory.

Even though NII comprises approximately one-quarter or less of total revenue, lower rates continued to constrain profitability. But the good news is that NII stabilized in the third quarter, as we expected, and it was even up moderately on a sequential basis for two of the trust banks. As the yield curve improves, we expect modest NII growth for the trust banks. Separately, lower rates are also causing the trust banks to have lower revenue in their cash management businesses because of money market fee waivers, which moderated somewhat in the third quarter due to an improvement in short-term rates. We note that each of the trust banks is focused on cost controls to support earnings.

Trust banks' balance sheets remain bloated because of excess deposits, accentuated by the excess liquidity in the monetary system. We note that deposits declined modestly for two of the trust banks in the quarter. Even so, 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.

Asset quality remained benign in these banks' relatively small loan portfolios, helped by the economic recovery, and in their high-quality securities portfolios. To varying degrees for each bank, earnings got a boost from loan loss provision benefits, as they released some reserves they had built during the 2020 recession.

The trust banks--except for State Street--have resumed common share repurchases, and we expect regulatory risk-adjusted capital ratios to decline in 2021 but remain at adequate levels. (Note: Upon announcing the acquisition of Brown Brothers Harriman, State Street raised equity capital and suspended share repurchases until second-quarter 2022). We anticipate the Tier 1 leverage ratios will continue to be restricted by the larger balance sheets from the deposits and corresponding cash surge. However, we expect the trust banks to manage the leverage ratios so that they are comfortably above regulatory minimums. Notably, the Tier 1 leverage ratio declined for the Bank of New York Mellon in the quarter, was flat for Northern Trust, and increased for State Street, largely due to the common stock issuance.

Improved U.S. Economic And Industry Risk Trends Have Resulted In Favorable Outlook Revisions For Some GSIBs

GSIBs' financial performance and balance sheets have remained solid since the start of the pandemic, thanks in part to prudent regulation. Because we have gained confidence in the strength and resilience of the U.S. banking system, we may revise the anchor for our ratings on banks in the U.S. to 'a-' from 'bbb+' in the next one to two years, which could result in higher ratings on some banks.

Consequently, we revised our rating outlooks on Bank of America Corp., JPMorgan Chase & Co., and Morgan Stanley to positive from stable in May following the changes in the economic and industry risk trends, the two main factors in our Banking Industry And Country Risk Assessment. These banks compare well with similarly or higher-rated peers, including banks domiciled in other countries with 'a-' anchors. (For more, see "Various Rating Actions Taken On Large U.S. Banks And Consumer-Focused Banks Based On Favorable Industry Trends.")

Table 7

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

Bank of America Corp.

A-/Positive/A-2 1 A+/Positive/A-1

Citigroup Inc.

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

JPMorgan Chase & Co.

A-/Positive/A-2 1 A+/Positive/A-1

Wells Fargo & Co.

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

Morgan Stanley

BBB+/Positive/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 Nov. 10, 2021. ALAC--Additional loss-absorbing capacity.

Base-Case Expectations For The Remainder Of 2021 And 2022

GSIBs have performed well thus far in 2021, with earnings up sharply, largely driven by reserve releases, and balance sheets remain in good shape. GSIBs have entered the fourth quarter benefiting from robust economic growth and continued monetary stimulus, as well as improved profitability, asset quality, and funding conditions relative to a year earlier.

That said, the pandemic still poses risks, as banks face threats related to elevated home prices, a booming leveraged loan market, structural changes in the CRE market, and an impending change in monetary policy. Other risks include the impact of the Fed's announced tapering, the threat of inflation, and possibly more aggressive monetary tightening as a result. The transition from the London Interbank Offered Rate, the need to keep up with competitors in terms of technology, and possibly tighter regulation are some other risks. Notably, the term of the Fed's vice chair for supervision, Randall Quarles, recently ended. His successor will have significant sway over the application of regulation and supervision, which is of paramount importance to the GSIBs. While we don't expect that to result in any major changes in regulation, it could bring a more conservative approach to supervision.

A tightening of monetary policy, if done smoothly, could benefit banks by boosting their spread income and lifting net interest margins from very low levels. That said, in a more pessimistic scenario, it could also cause volatility in markets, higher charge-offs, and potentially a slowdown in the economy (see "North American Financial Institutions Monitor 4Q 2021: Riding The Economy's Tailwind And Aiming For A Smooth Landing").

Lastly, COVID-19 accelerated banks' push into technology–-in particular, consumers' adoption of mobile banking picked up, and the need for branches diminished. Given the size of the GSIBs, we expect these banks to remain ahead of the curve in terms of digital rollout. Notably, a majority of GSIBs reported quarter-over-quarter increases in both online and mobile banking users in the third quarter. Digital trends continue to be strong as retail mobility recovers at a faster pace than branch transactions, which are still down from pre-pandemic levels.

Category S&P Global Ratings' Outlook
Net interest income NII will benefit from improving loan growth, continued low-cost deposit growth, and deployment of excess liquidity as GSIBs are poised to capture the benefit of higher rates, whenever that may occur. However, with excess liquidity persisting longer and NIMs at their lowest levels in many years, improvement in NII will likely be limited without any imminent rate hikes.
Noninterest income Noninterest income will continue to aid earnings but will likely decelerate as capital market revenues cool from their elevated levels. Asset and wealth management revenues should continue to benefit assuming asset valuations remain elevated. We expect card income and service fees to improve because of greater consumer spending. As a partial offset, mortgage revenue might normalize given the lower refinancing volume and tighter gain-on-sale margins.
Provision for credit losses We expect positive, but low, provisions going forward--though third-quarter earnings have shown further negative provisions--before a normalization in 2022. GSIBs probably still have some room to reduce their ratios of reserves to loans, which were above pre-pandemic levels (inclusive of the day 1 current expected credit losses [CECL] impact), but any further drop should be more gradual. Provisions in 2022 will depend on loan growth and the strength of the economy.
Noninterest expense GSIBs will keep expenses in sharp focus but will also invest considerable sums in technology. 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 some banks.
Loans Absent any constrains like supply chain disruptions and labor shortages, loan growth will improve as the economy moves further away from the depths of the pandemic and PPP forgiveness wanes.
Deposits Deposit growth should continue at a moderate pace until the Fed begins tapering. After that, the pace of loan growth and the Fed's balance sheet actions will mostly determine deposit growth.
Capital With regulatory restrictions lifted and an improving economy, we expect GSIBs to accelerate payouts as stipulated by their regulatory capital requirements but only reduce capital ratios in a calibrated manner. For some, the leverage ratio could constrain capital returns as well as the ongoing CECL phase-in.
Credit quality Credit quality is at unsustainably strong levels and will likely normalize in 2022. Any such deterioration will be gradual given GSIBs' healthy balance sheets and excess liquidity. Also, exposure to industries impacted by COVID-19 represents a small portion of the loan portfolio.
Trust banks We expect the major U.S. trust banks' overall creditworthiness to remain stable and in line with their high ratings, given the companies' low credit-risk balance sheets, good fee-based revenue, and adequate capital ratios. Earnings power should continue to be satisfactory, although fee revenues are vulnerable to market valuation fluctuations. Each of the banks--with their dominant market shares-- appears to have good momentum related to new business and inflows that support AUCA. In 2022, we expect money market fee waivers to ease, and NII to increase modestly because of higher securities reinvestment yields. Despite common share repurchases, capital ratios should remain satisfactory for the ratings.

This report does not constitute a rating action.

Primary Credit Analyst:Stuart Plesser, New York + 1 (212) 438 6870;
stuart.plesser@spglobal.com
Secondary Contacts:Devi Aurora, New York + 1 (212) 438 3055;
devi.aurora@spglobal.com
Brendan Browne, CFA, New York + 1 (212) 438 7399;
brendan.browne@spglobal.com
Rian M Pressman, CFA, New York + 1 (212) 438 2574;
rian.pressman@spglobal.com
Research Contributor:Srivikram Hariharan, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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