NEW YORK (S&P Global Ratings) May 23, 2023--S&P Global Ratings' banks team hosted a webinar today to discuss its updated views following first-quarter results and challenging industry conditions. The webcast slides can be found in "U.S. Banks Webinar Q1 2023: Navigating Choppy Waters."
U.S. bank ratings remain largely on stable outlooks with 86% listed as stable as of May 22. Analysts noted that the heightened volatility related to the bank failures of SVB Financial and First Republic Bank in March 2023 are a reminder of the industry's confidence sensitivity. As a result, the industry risk in the U.S. banking sector has shifted to stable from positive.
Banking industry expectations ranged from the presenters expecting net interest income to likely tick down each quarter as deposit and funding costs increase, to delinquencies and charge-offs rising with a shallow recession, and deposits continuing to fall.
"Funding ratios should worsen from historically strong levels as deposits decline in response to the rise in rates and quantitative tightening," said Devi Aurora, senior director and analytical manager with S&P Global Ratings, adding that "Deposit betas are an area we are watching closely."
There was a significant drop in deposits for smaller banks during March following the SVB failure. Since then, there has been more stability, and so far there has not been an acceleration of deposits from little to big banks.
Most large banks increased their capital ratios in the first quarter through earnings retention and with improved valuations of their available-for-sale (AFS) securities. Presenters noted that the upcoming June Fed stress test results will be an important driver of capital planning for the large banks, as well as the Fed's finalization of the Basel 3 standards.
Loan growth is likely to slow in 2023 after last year's robust pace, and credit provisions are likely to trend higher amid the uncertain economy. Presenters said loan growth will likely decelerate meaningfully this year toward roughly 2% as economic activity likely slows.
In terms of some of the key risks and trends, lending standards across most loan types have tightened amid a softening economy, and provisions will be an important component to how banks fare in 2023. S&P Global Ratings' base-case scenario in its forecast incorporates 2% loan growth, charge-offs of 40 basis points, and a 1.8% allowance to loans by year-end, up from 1.66% in the first quarter.
S&P Global economists continue to expect a short and shallow recession as their base case, centered mainly around the middle half and increasingly toward the second half, and core inflation to persist around the 4.7% range in 2023.
During a webcast poll on scenarios most likely within the next year, 71% of the participants said they think rates will remain around the current levels, but the economy grows slowly or enters a shallow recession, while 11% voted that a significant recession could be on the horizon.
"Again, what is going to be critical for us in our evaluation and assessment of bank ratings is the depth and duration of a downside scenario and evaluating the risk that rates rising will tip the economy into a significant recession that is negative for banking," said Ms. Aurora.
This report does not constitute a rating action.
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| Primary Credit Analysts: | 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 | |
| E.Robert Hansen, CFA, New York + 1 (212) 438 7402; robert.hansen@spglobal.com | |
| Stuart Plesser, New York + 1 (212) 438 6870; stuart.plesser@spglobal.com | |
| Media Contact: | Jeff Sexton, New York + 1 (212) 438 3448; jeff.sexton@spglobal.com |
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