Joy Macknight

While much focus has been on the recent bank failures in the US, many of the larger institutions have improved their financial performance due to net interest income growth and another quarter of strong trading results.

The quite spectacular implosions of Silicon Valley Bank and First Republic Bank, as well as JPMorgan Chase’s dramatic acquisition of the latter, have left many wondering about the state of the US banking industry.

However, despite the tumultuous start to the year, many of the larger banks have reported good first quarter results, as well as robust trading results.

According to a recent DBRS Morningstar report, the median DBRS Morningstar-rated US bank generated a low, double-digit return on equity driven by substantial year-on-year growth in net interest income mainly due to higher interest rates. Its research also found that capital metrics remain strong and well in excess of required minimums.

Much has been made of the deposit outflows from the smaller banks, but the regional players have not seen such dramatic shifts. And the larger global systemically important banks have even seen deposit inflows, which many have seen as a flight to quality. There has also been a continued shift of deposits into interest-bearing balances, as higher rates are leading customers to look for higher-yielding alternatives.

“Looking forward, we expect these trends to continue, with deposit outflows stabilising, as interest rate hikes slow,” said DBRS Morningstar.

One longer-term area of concern that the report highlights is asset quality deterioration, as the rise in interest rates acts as a brake on the economy and negatively impacts asset values, particularly in commercial real estate (CRE) where retail and office properties are under pressure.

“To that end, we see small and mid-size banks as more vulnerable, considering that banks with less than $250bn in assets hold about three-quarters of all CRE loans outstanding, a large portion of which is not ‘Class A’ exposure,” DBRS Morningstar said.

Read more about US banks 

In an earlier report, the credit rating agency analysed the US capital markets first quarter results, which saw net revenues remaining “outsized” due to robust trading performance. According to DBRS Morningstar’s data, total net revenues were more than 30% above the pre-Covid-19 pandemic run rate and down only 13% compared to an exceptional first quarter in 2022.

Fixed income sales and trading saw particularly strong results. Specifically, net revenues, on average, were up 46% quarter on quarter and only slightly behind an extraordinary first quarter last year. According to the report, results were driven by strength in rates and credit, partially offset by lower revenues in currencies and commodities.

In addition, equities sales and trading results also remained strong, with net revenues, on average, increasing 24% versus the prior quarter.

However, investment banking results continued to be weak across businesses, as total net revenues declined 23% year-on-year. While activity levels remained muted, investment grade issuance was a bright spot in the first quarter of this year.

“Looking forward, strategic dialogues have picked up in recent weeks and pipelines were reported to be healthy,” according to DBRS Morningstar. “Whether this converts to revenue will likely require a clearer economic outlook and improving CEO confidence in our view. Our expectation is for activity levels to pick up at some point in the second half of the year, but probably more so in 2024.”

While the majority of the banks in DBRS Morningstar’s cohort are well positioned going forward, clearly the largest banks with diverse business lines are particularly able to take advantage of the volatile environment. As such, the rating agency is expecting an accelerated consolidation in the US banking sector, “especially with the expected increase in regulatory costs that are likely coming for banks under $250bn in assets”.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

Register to receive the Editor’s blog and in-depth coverage from the banking industry through the weekly e-newsletter.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter