Revenues Stay Soft For Large Banks And Trust Banks In The U.S.
|Publication date: 14-Feb-2012 11:15:20 EST|
Industry Credit Outlook
Despite further signs of recovery in the U.S. economy, large banks continue to grapple with the effects of high unemployment, the weak housing market, the European sovereign debt crisis, and new global financial regulations. Their reported earnings in fourth-quarter 2011 were weak. Still, credit fundamentals continued to improve across loan categories for most large complex banks in fourth-quarter 2011. As a result, lower credit provisioning and higher cost controls allowed them to build capital while preparing for new regulations. Meanwhile, U.S. trust banks' profitability remained satisfactory, but low interest rates and subdued capital market activity continued to hamper their revenue growth.
In 2012, we expect large banks and trust banks to continue to build capital. But the sluggish U.S. economic recovery, the subdued capital markets, and the low interest rates are likely to keep earnings growth down.
The Pressure Is On Revenues
The U.S. unemployment rate fell to 8.3% last month, but our economic outlook remains tepid. Stresses in Europe, including sovereign debt concerns and their potential impact on financial institutions and the general economy, have combined with the U.S.'s housing market struggles and tenuous economic recovery to sap activity from the capital markets. The equity and bond markets' trading volumes were down in the fourth quarter as many risk-averse investors stayed on the sidelines. The pace of mergers and acquisitions also slowed during the second half of 2011.
Many banks have reacted by reducing the risk taking in their trading operations. This, along with seasonally lower activity and clients' own risk aversion, resulted in lower trading results for the quarter. We believe these results could improve in first-quarter 2012, partly due to the positive impact of the European Central Bank's liquidity infusion. However, we believe this is just a temporary solution, and that the capital markets will likely remain volatile until a more permanent solution is proffered.
Loan growth in sectors such as auto and education has resumed at some banks. (See "U.S. Bank Loans: Battling Back From The Recession As Growth Remains Weak," published Feb. 7, 2012, on RatingsDirect on the Global Credit Portal.) Many banks have expanded their commercial and industry loan portfolios, partly because of seasonal demand and the void European banks have left in the market. Credit card lending also increased. And while this could reflect seasonal demand, it could also be a sign of loosening lending standards, which would be a positive for consumer spending but a potential longer-term risk from a credit perspective. Still, the uncertain economic recovery will likely constrain loan growth overall.
Low interest rates have been squeezing banks' net interest margins (NIMs)--the higher yielding assets on their balance sheets continue to run off, only to be replaced by lower yielding U.S. treasuries and other safe investments (see table 1). This will likely continue for the foreseeable future, since the Federal Reserve recently announced its plans to keep short-term interest rates near zero through late 2014. Although banks' funding costs declined as they paid down debt and their deposit balances increased, it wasn't enough to offset the decline in investment yields. We expect flat or falling NIMs, combined with weak loan growth, to result in mostly flat net interest income for banks over the next few quarters.
|Net Interest Margin (%)|
|Q3 2010||Q4 2010||Q1 2011||Q2 2011||Q3 2011||Q4 2011||QoQ|
|Wells Fargo & Co.||4.25||4.16||4.05||4.01||3.84||3.89||0.05|
|PNC Financial Services Group||3.96||3.93||3.94||3.93||3.89||3.86||(0.03)|
|J.P. Morgan Chase & Co.||3.01||2.88||2.89||2.72||2.66||2.70||0.04|
|Bank of America Corp.||2.72||2.69||2.67||2.50||2.32||2.45||0.13|
|Goldman Sachs Group Inc.||N.M.||N.M.||N.M.||N.M.||N.M.||N.M.||N.M.|
|N.M.--Not meaningful. QoQ--Quarter over quarter.|
Banks are experiencing the effects of new regulation as well. The Durbin Amendment, which limits debit interchange fee income, took effect in the fourth quarter and was partly responsible for the drop in the banks' noninterest income. In addition, Regulation E (which limits the amount of overdraft fees banks can charge) and the CARD Act (which limits fee and rate hikes for credit card borrowers) will continue to pressure banking revenues this year (see table 2).
|Q3 2010||Q4 2010||Q1 2011||Q2 2011||Q3 2011||Q4 2011||QoQ (%)|
|Wells Fargo & Co.||20.9||21.5||20.3||20.4||19.6||20.7||5.44|
|PNC Financial Services Group||3.6||3.7||3.6||3.6||3.5||3.5||0.14|
|J.P. Morgan Chase & Co.||24.6||26.7||25.8||27.3||22.5||22.8||1.25|
|Bank of America Corp.||27.2||23.6||27.7||23.3||19.2||19.5||1.55|
|Goldman Sachs Group Inc.||9.1||8.8||11.9||7.2||3.1||6||92.25|
While we expect that banks will try to mitigate the loss of these fees, those revenues may not be easy to replace. Public push-back has already caused some banks to rethink their strategies. We also expect new regulations stemming from the Dodd-Frank Act (DFA), such as the Volcker Amendment, to result in less trading revenue and higher compliance costs. However, we will not be able to assess the regulations' specific impact on banks until the rules are final. Furthermore, repurchase and warranty costs related to mortgage underwriting will likely continue to pressure banks' top line in 2012, mostly through requests from government-sponsored entities, as was the case in fourth-quarter 2011. The full-year 2012 impact, however, should be milder than in 2011.
The Pace of Credit Improvement Has Slowed
Nonperforming loans remained high on a historical basis in most categories, even though charge-offs and the formation rate for new nonperforming loans have declined.
The foreclosure process is the main culprit: Delays mean borrowers that have been delinquent on their payments can't be foreclosed on in a timely manner, which keeps those bad loans on banks' books longer. However, the recent mortgage servicer settlement could help to loosen some of the blockage in the foreclosure process we've seen in some states (see "U.S. Mortgage Servicers' $25 Billion Settlement Shouldn't Affect Ratings," published Feb. 10, 2012). That said, banks have continued to push foreclosure alternatives such as short sales and deed-in-lieu transactions, which are intended to help keep borrowers in their homes and reduce losses. Banks also have continued with other loss-mitigation efforts, including various modification programs. We include these foreclosure alternatives, which are classified as troubled debt restructurings, in our nonperforming loan ratios. This is an appropriately conservative approach, in our opinion, that reflects the risk inherent in a borrower that has already required a restructuring of his obligation once, amid a relatively weak housing market and economic recovery.
Despite the ongoing weakness in home prices, banks have been less apt to reduce loan loss reserves for their residential mortgage and home equity portfolios. Some banks also increased their reserves in 2011, which keeps them "well reserved" for the potential losses embedded in their portfolios.
The pace of credit improvement in banks' credit card portfolios has slowed noticeably in recent quarters, and net charge-off rates are nearing historical average levels (see table 3). The delinquency rates are also at or near historical averages. As a result, we expect negligible reserve releases in this segment for the foreseeable future.
|Nonperforming Loans/Loans (%)|
|Q3 2010||Q4 2010||Q1 2011||Q2 2011||Q3 2011||Q4 2011||QoQ|
|Wells Fargo & Co.*||3.99||3.67||3.51||3.23||3.03||2.91||(0.12)|
|PNC Financial Services Group*||3.41||3.13||3.04||2.71||2.5||2.34||(0.16)|
|J.P. Morgan Chase & Co.*||2.52||2.39||2.18||1.92||1.75||1.52||(0.23)|
|Bank of America Corp.*||3.6||3.4||3.3||3.04||2.95||2.82||(0.13)|
|*Excludes purchase impaired. **Excludes covered assets. QoQ--Quarter over quarter.|
The charge-off rates in most other loan categories have also declined--though not as quickly as in the bank credit card segment--and are still higher than normal. Overall, we expect banks to make smaller marginal reserve releases this year.
Reserve Releases Aren't Enough To Offset Banks' High Costs
Large banks' expense ratios continued to increase and constrained earnings in the fourth quarter. The main culprit was weak revenues, which we expect to continue through 2012. In addition, regulatory compliance costs are likely to remain high for the foreseeable future, so banks must look elsewhere to improve efficiency.
The lower capital markets revenue and higher regulatory costs are causing banks to look for cost-cutting opportunities, which could mean more layoffs and employee compensation cuts. Furthermore, as banks implement the cost-cutting initiatives they've previously announced, many have already confirmed that those efforts may not be enough. Overall, we expect that efficiency ratios will remain high on a historical basis until the banks' expense reduction efforts take hold and the poor performing legacy assets are removed from the portfolios or the banks experience sustained improvement in revenue generation.
Yet, despite the obstacles to increasing their preprovision earnings, the largest U.S. banks have reported higher profits on average due to reserve releases (see table 4). We expect this benefit to wear off during the next few quarters. Conversely, if the economy strengthens more than we anticipate, revenues and earnings could improve due to strengthening loan demand, rising long-term interest rates, and more widespread reserve releases.
|Pretax Preprovision Income|
|Q3 2010||Q4 2010||Q1 2011||Q2 2011||Q3 2011||Q4 2011||QoQ|
|Wells Fargo & Co.||8,621||8,154||7,596||7,911||7,951||8,097||146|
|PNC Financial Services Group||1,440||1,563||1,561||1,426||1,404||830||(574)|
|J.P. Morgan Chase & Co.||9,426||10,055||9,226||9,937||8,229||6,931||(1,298)|
|Bank of America Corp.||(516)||1,534||6,594||(9,620)||10,840||5,366||(5,474)|
Banks Continued To Increase Capital, But Capital Management Actions Will Slow The Pace
The new capital requirements that Basel III and the DFA have prescribed are shaping banks' capital plans. We believe the higher quantity and quality of capital banks aspire to will support the current issuer credit ratings, since we've already incorporated these future capital levels in our forward-looking analysis of capital and earnings.
Banks are still wrestling with estimating potential capital and liquidity ratios (see table 5). But they have generally moderated capital building exercises to take advantage of the protracted implementation of Basel III. To this end, banks have been returning more capital to shareholders, assuming regulatory approval.
|Tier 1 Common Capital Ratio|
|Q3 2010||Q4 2010||Q1 2011||Q2 2011||Q3 2011||Q4 2011||QoQ (bps)|
|Wells Fargo & Co.||8.01||8.30||8.92||9.15||9.34||9.46||12|
|PNC Financial Services Group||9.60||9.80||10.30||10.50||10.50||10.30||(20)|
|J.P. Morgan Chase & Co.||9.50||9.80||10.00||10.10||9.90||10.00||10|
|Bank of America Corp.||8.45||8.60||8.64||8.23||8.65||9.86||121|
|Goldman Sachs Group Inc.||13.00||13.30||12.80||12.90||12.10||12.10||0|
|QoQ--Quarter over quarter. Bps-Basis points.|
Meanwhile, the Federal Reserve's Comprehensive Capital Analysis and Review for 2012 is underway. The results are expected in March and will guide banks' capital management actions in the year ahead. We expect some banks to accelerate the pace of their share buybacks to boost stock prices, but we don't anticipate much in the way of higher dividend payouts. Instead, many banks may focus on redeeming the hybrid capital securities that will be phased out of regulatory capital between 2013 and 2015, as mandated by the Collins amendment in the DFA.
Some banks have been actively redeeming eligible trust preferred securities, though many of these hybrid securities cannot be redeemed until the regulatory proposals are finalized as rules. Measured capital management actions should not hurt the ratings on banks, but a bank's more aggressive capital management actions could hurt the ratings. In general, we expect that banks will be able to meet new regulatory minimums within the timelines allotted through a combination of earnings growth and risk mitigation.
Revenues Remain Soft For Trust Banks, But Profit Margins Are Fine
The three rated U.S. trust banks, Bank of New York Mellon Corp., State Street Corp., and Northern Trust Corp., continued to post satisfactory profits in the fourth quarter. Although revenue trends were a bit disappointing, the companies' pretax operating margins, which were in the mid-20% range, were within our expectations for the ratings. The companies' asset servicing and investment management fees declined from the third quarter, reflecting factors such as lower transaction volumes and shifts by clients into less risk assets that generate lower fees. Still, the assets under custody and administration and assets under management held fairly steady, reflecting market appreciation during the quarter and net new business. Equity market trends should help increase fee revenue in the coming quarters.
NIMs were either flat or down, reflecting lower asset yields. However, net interest revenue increased for the third consecutive quarter at each of the trust banks, reflecting the larger average balance sheets from their custody clients' deposit inflows. We expect that these deposit inflows, which stem from the money managers' risk aversion, could remain high in the short term but decline to more normal levels over time.
Still, the trust banks' fee waivers in their low-yielding money market-related businesses have been hurting revenue. We believe that, combined with the very low interest rates, will cut into revenue generation in coming quarters.
Foreign exchange trading revenue declined during the quarter, reflecting lower market volumes and high volatility. We believe that Bank of New York Mellon and State Street have stable client volumes in their foreign exchange business, despite legal issues pertaining to their foreign exchange pricing practices.
The trust banks' operating expense trends were mixed, but each bank has said it intends to remain focused on expense growth controls in 2012 and through the next few years. Northern Trust announced its efficiency plan, becoming the third of the three trust banks to institute cost-cutting initiatives. Each bank took restructuring charges in the fourth quarter.
The trust banks' capital trends are a key rating factor because share repurchases are affecting capital accumulation. The Bank of New York Mellon substantially slowed its share repurchases during the quarter, mainly addressing the need to build its Basel I leverage ratio. Still, in 2012, we expect that each banks' capital, which is deployed in common share repurchases and common stock dividends, will be fairly high at about 60%-65% of net income. Our ratings on the trust banks assume that the companies will implement share buybacks at a measured pace, conservatively managing their capital levels in light of the volatile market conditions.
Our outlook remains negative for the majority of large banks and trust banks. We are encouraged by the banks' increasing capital and improved credit fundamentals. But we will continue to evaluate the effects that housing market weakness, regulations from new legislation, higher representation and warranty costs, low interest rates, and litigation concerns could have on the industry. For most banks, our outlook reflects the negative outlook on the sovereign rating on the U.S., and the likely impact a potential downgrade of the U.S. would have on the support we factor into those ratings, in addition to bank-specific factors.
Our base case expectations for 2012 include:
- Lower revenue due to continued low interest rates and weak capital markets results.
- A modest reduction in operating efficiency as costs remain high, largely as a result of regulatory changes, and revenue declines.
- A continued improvement in credit quality.
- A moderate rise in net income, fueled by reserve releases.
- Increasing capital, subject to the pace of hybrid capital retirement and returns to shareholders.
The risk of a recession in Europe and the potential impact on large U.S. banks also temper our outlook. The banks' direct loan and counterparty exposure to the European Economic and Monetary Union seems manageable as long as collateral quality remains strong and risk hedges work as intended. However, the scenario would worsen if potential liquidity and funding issues in Europe spread to the U.S., negatively affect the wholesale funding markets, which U.S. institutions rely on. A shock to the system could also hurt U.S. institutions because of a rise in the probability of a global recession. In addition, if the pace of distressed asset sales increased, it would likely hurt global asset values. Ultimately, if these events occur, we believe they would pressure large U.S. banks' creditworthiness. However, although we consider these risks in our analysis, our ratings on those entities currently don't incorporate a high probability of a global recession or system shock.
Industry Credit Outlook
|Company/Issuer Credit Rating*/Comments||Analyst|
|Bank of America Corp.(A-/Negative/A-2)|
|BAC generated adjusted pretax earnings of $490 million in the fourth quarter, compared with a loss of $425 million in the fourth quarter of 2010. The earnings excluded a number of one-time adjustments, such as $5.3 billion in gains on sales of investments and a trust preferred securities exchange. The results also benefited from $1.1 billion in loan-loss reserve releases, compared with $1.7 billion in the previous year quarter. The adjusted revenue declined 17.6% year over year, partly due to weaker trading results stemming from uncertain global macroeconomic conditions and low interest rates. The adjusted global banking and markets revenue (excluding debt valuation adjustments) increased from the third quarter, with sales and trading revenue increasing by $787 million. The NIM increased 13 bps from the third quarter to 2.45%, largely because of reduced deposit costs and lower long-term debt. Expenses, excluding merger and acquisition charges, and goodwill impairment increased as a result of higher litigation accruals and Federal Deposit Insurance Corp. expenses. Asset quality continued to improve as net charge-offs and nonperforming loans decreased, while credit card delinquencies declined, and residential mortgage and home equity delinquencies remained flat. The Tier 1 common capital ratio increased 121 bps from the third quarter to 9.86%.||John K. Bartko|
|Citi generated adjusted pretax earnings of $1.3 billion (excluding a $41 million gain on the fair value of its debt) in the fourth quarter, compared with $1.9 billion in the fourth quarter of 2010. The results benefited from $1.5 billion in reserve releases in the quarter, versus $2.2 billion of reserve releases in the fourth quarter of 2010. The adjusted revenue for Citicorp declined 7.2% year over year, largely because of weaker trading results stemming from uncertain global macroeconomic conditions. Total expenses increased 3.8% sequentially because of ongoing business investments and higher legal and workforce reduction expenses. Management expects to reduce expenses by $2.5 billion to $3 billion in 2012. Losses in Citi Holdings ($806 million) continued to weigh down results. Citi Holdings' assets declined 6.9% to $269 billion in the fourth quarter. Although credit costs remain elevated, net credit losses were down 9.0% from the third quarter. The delinquency trends continued to improve across most asset classes, except for North American residential mortgages. The reserve coverage to nonperforming loans was an adequate 268%, and the Tier 1 common capital ratio increased 10 bps sequentially to 11.8%. Management targets a Tier 1 Basel III common capital ratio of 8%-9% by year-end 2012.||Stuart Plesser|
|The Goldman Sachs Group Inc.(A-/Negative/A-2)|
|Goldman generated adjusted pretax income of $1.2 billion in the fourth quarter, compared to a $1.2 billion loss in the previous quarter, and a $3.8 billion profit in fourth-quarter 2010. Its earnings benefited from mark-to-market improvements in the investing and lending segment. Goldman continued to perform well in the league tables, according to Thomson Reuters, with a global mergers and acquisitions market share of 28.4% in the fourth quarter. The investment banking revenue was up 10% while institutional client services' revenue declined 16% from the third quarter. The investment management revenue was up 3% from the previous quarter, and it remained the most stable segment. Assets under management were essentially flat year over year. The $1.4 billion expense-reduction program seems to be taking effect, and staff levels were down 7% from year-end 2010. Capital ratios were unchanged from the third quarter. The Tier 1 common (Basel I) ratio was 12.1%, compared with 13.3% as of fourth-quarter 2010. Goldman disclosed an estimated Basel III Tier 1 common ratio of slightly lower than 8.0% as of December 2011. In the fourth quarter, the company repurchased $908 million in stock, almost equal to earnings.||Matthew Albrecht|
|JPMorgan Chase & Co.(A/Stable/A-1)|
|JPM generated $5.3 billion of adjusted pretax earnings, down from $7.0 billion during the same period in 2010. The results excluded a $570 million loss resulting from the narrowing of the company's credit spreads. The adjusted revenue declined 14.8% to $22.8 billion year over year, mainly because of weaker investment banking revenue, which was particularly affected by lower equity trading as market volumes remained subdued. The retail financial services' revenue declined significantly because of lower mortgage revenue. The NIM increased by 4 bps from the previous quarter to 2.7%, largely because of the lower cost of wholesale liabilities. Consumer credit trends improved, albeit at a more moderate pace, with net charge-offs declining 3.6% in the fourth quarter versus a 12.1% sequential decline the previous quarter. JPM released roughly $700 million of reserves in the fourth quarter and $4.7 billion in full-year 2011. The Tier 1 common ratio was 10.0% in the fourth quarter, up 10 bps from the previous quarter. JPM repurchased $950 million of common stock in the fourth quarter and roughly $9 billion in 2011. Aggressive additional share repurchases could pressure the ratings if the total buybacks begin to impede JPM's capital ratios.||Stuart Plesser|
|Morgan Stanley reported adjusted pretax income of $1.0 billion, compared with $271 million in the third quarter and $1.7 billion in fourth-quarter 2010. Debt valuation adjustments (DVA) were $216 million, compared with $3.4 billion in the third quarter and -$945 million a year earlier. The other adjustment this quarter was $1.7 billion for the MBIA Inc. settlement. Revenue (adjusted for DVA and in the fourth quarter the MBIA loss) was up 19% from the third quarter and down 15% compared with fourth-quarter 2010. Quarter over quarter, advisory revenue was down 2%, equity underwriting was down 21%, debt underwriting was up 36%, and debt sales and trading was up 11%. Morgan Stanley continued to perform well in the league tables, according to Thomson Reuters, with a global completed mergers and acquisitions market share of 20.6% in the fourth quarter, compared with 21.4% as of year-end 2010. The global wealth management segment posted a pretax margin of 7.5%, down from 11.1% in the third quarter. Asset management revenue was up 107% in the fourth quarter, though results benefited from a weak third-quarter comparison. The Tier 1 common ratio (Basel I) declined to 13.0% from 13.1%, but was up substantially from 10.5% in fourth-quarter 2010.||Matthew Albrecht|
|PNC Financial Services Group(A-/Stable/A-2)|
|PNC's posted adjusted pretax earnings of $838 million, down 27% from the third quarter. The new debit card interchange rules lowered revenue from consumers, but corporate banking fees increased in the fourth quarter following a charge that reduced revenues in the third quarter. A $240 million mortgage foreclosure accrual and higher personnel costs led to a sharp rise in expenses. Deposits were flat quarter over quarter, reflecting the continued run off of higher-cost certificates of deposit, offset by growth in consumer and commercial transaction deposits. The loan portfolio expanded across most commercial and residential categories, excluding real estate loans. PNC's purchase of RBC Bank (USA) should expand the loan portfolio by roughly 10%. The NIM declined 3 bps from the third quarter due to declining yield on loans and securities. Credit metrics continue to improve as nonperforming loans dropped to 2.24% of loans from 2.39% in the third quarter, while net charge-offs declined 12 bps to 0.83% on an annualized basis. PNC's Tier 1 common capital ratio declined 20 bps to 10.3%, largely reflecting higher risk-weighted assets due to loan growth.||Matthew Albrecht|
|USB posted adjusted pretax earnings of $1.59 billion (excluding a merchant settlement gain of $263 million) in the fourth quarter, a decline from $1.74 billion in the previous quarter and an increase compared with $1.17 billion in the fourth quarter of 2010. The adjusted revenue increased 1.0% from the third quarter and 4.8% year over year, reflecting an increase in average earning assets and fee-based income, which helped to offset NIM compression. The NIM declined 5 bps from the third quarter to 3.60%, reflecting higher balances in lower-yielding investments and a larger cash positions at Federal Reserve. The adjusted noninterest income was basically flat versus the previous quarter because lower credit and debit card revenue offset the higher mortgage banking revenue. Expenses increased 8.9% from the third quarter largely due to a $130 million litigation accrual regarding mortgage servicing matters. The average total loans increased 5.5% year over year (excluding acquisitions), largely due to market share gains and higher residential and commercial loan growth. Net charge-offs were down 7.0% from the third quarter, and USB released $125 million in reserves (versus $150 million in the third quarter), reflecting improving credit quality. The Tier 1 common ratio increased 10 bps from the third quarter to 8.6%, while the estimated Basel III Tier 1 common ratio was 8.2%.||Stuart Plesser|
|Wells Fargo & Co.(A+/Negative/A-1)|
|WFC generated $6.1 billion in pretax income, essentially unchanged from the previous quarter but up 17.3% year over year. The results benefited from a $600 million reserve release, down from $800 million in the third quarter. Pretax, preprovision earnings totaled $8.1 billion, up from $8.0 billion in the third quarter but marginally lower than the $8.2 billion reported last year. Credit quality improved as net charge-offs declined to 1.36% from 1.37% in the third quarter and provision increased to $2.0 billion from $1.8 billion. The purchase credit impaired portfolio still possessed credit risk but continued to perform better than we had expected. Reported total nonperforming assets fell to 3.4% from the peak of 4.6% in third-quarter 2010. Core loans were up 2.1% for the quarter, while core deposits increased 2.7%. NIM rose 5 bps to 3.89%, reflecting an increase in loans and mortgages along with some reduction in deposit costs. The Tier 1 common equity increased 12 bps to 9.46% from the third quarter and 116 bps from fourth-quarter 2010. WFC reported an estimated Basel III Tier 1 common ratio of 7.5%. The company also redeemed $5.8 billion in trust preferred securities during the quarter.||Kenneth Frey, Jr.|
|Northern Trust Corp.(A+/Stable/A-1)|
|NTRS's third quarter earnings were satisfactory in the context of the challenging operating conditions. Net income was $130 million, down from $170 million in the third quarter. However, adjusted for extraordinary items (mainly $40 million in after-tax restructuring costs), the operating net income was $162 million. We estimate a pretax operating margin of about 24%, which is within our expectations. The company recently announced productivity initiatives should bolster the operating margin over the next two years. Total revenue dipped 2% from the third quarter, mainly from lower fee revenue from a decline in the equity markets, as well as an increase in money market fee waivers, which totaled nearly $34 million in the quarter. Despite low interest rates, net interest income increased 6% because of a further inflow of noninterest-bearing deposits. Positively, the loan loss provision declined to $12.5 million and asset quality continued to improve as the nonperforming asset ratio eased to a low 1.10%. Capital metrics increased sequentially, and the company estimated its Basel III Tier 1 common ratio was a solid 12.3%. The rating assumes that the company will continue to manage its capital ratios above those of its peers.||Barbara Duberstein|
|Bank of New York Mellon Corp.(A+/Negative/A-1)|
|BK reported fair fourth quarter earnings, posting $505 million in net income--a decline from $651 million in the third quarter. The adjusted net income was $572 million, excluding $67 million in restructuring charges, mainly tied to expense reduction initiatives. Despite soft revenue trends, we favorably view BK's still decent 27% adjusted pretax operating margin. The total revenue declined 3% from the third quarter, reflecting reduced fee revenue, lower client activity volumes, and higher money market fee waivers. Although still pressured by low interest rates, net interest revenue increase 1% in the quarter, supported by further balance sheet growth from customer deposit inflows. Expenses declined 3% from the third quarter, mainly from lower staff expenses. Positively, BK boosted its capital ratios, as it sharply reduced its pace of common share buybacks. The company estimated that its pro forma Basel III Tier I Common ratio increased 60 bps to 7.1% at the end of the fourth quarter. The Basel I leverage ratio increased to 5.2% from 5.1%, providing more cushion above the 5.0% "well-capitalized" minimum. Although we expect that BK's buyback pace will increase in first-quarter 2012, we believe its fourth-quarter capital management underscores its commitment to further improving its capital ratios.||Barbara Duberstein|
|State Street Corp.(A+/Negative/A-1)|
|STT's fourth-quarter earnings were satisfactory. Its net income declined to $371 million from $543 million in the third quarter. On an adjusted basis, the net income declined a modest 5% to $454 million (excluding several items including $120 million in pretax restructuring costs). The adjusted pretax operating margin of 28% was within our expectations. The total operating revenue declined 5.3% from the third quarter, reflecting a 4% drop in servicing fees, which partly represented a client mix shift to less risky (lower-fee) assets under custody and administration. Although still pressured by low rates, the net interest income increased 2% from the third quarter because of further growth in earning assets, funded by higher customer deposits. The company kept its operating margins in check as total adjusted operating expenses declined 4.5%, mainly reflecting efficiency initiatives. STT estimated that its pro forma Basel III Tier 1 Common ratio increased to 12.09% as of year-end 2011, mainly reflecting a decline in calculated risk-weighted assets (RWAs). However, the company bought back a substantial $225 million in common shares during the fourth quarter. We expect that STT will increase its risk-adjusted capital ratios over time through earnings retention and possible RWA declines, despite its share repurchases and possible midsized acquisitions.||Barbara Duberstein|
|*The ratings are as of Feb. 8, 2012. NIM--net interest margin. Bps--basis points.|
|Recent Rating/Outlook/CreditWatch Actions|
|JPMorgan Chase & Co.||A/Stable/A-1||A+/Stable/A-1||Nov. 29, 2011||The ratings on JPM reflect its very strong business position, adequate capital and earnings, adequate risk position, average funding, and adequate liquidity, compared with its global peers that have the same industry and economic risk scores.|
|Citigroup Inc.||A-/Negative/A-2||A/Negative/A-1||Nov. 29, 2011||The ratings on Citi reflect its strong business position, adequate capital and earnings, moderate risk position, average funding, and adequate liquidity.|
|Goldman Sachs Group Inc.||A-/Negative/A-2||A/Negative/A-1||Nov. 29, 2011||The ratings on Goldman reflect its strong business position, adequate capital and earnings, moderate risk position, and average funding and adequate liquidity.|
|Bank of America Corp.||A-/Negative/A-2||A/Negative/A-1||Nov. 29, 2011||The ratings on BofA reflect its strong business position, adequate capital and earnings, moderate risk position, average funding, and adequate liquidity, compared with its global peers with the same industry and economic risk scores.|
|Wells Fargo & Co.||A+/Negative/A-1||AA-/Negative/A-1+||Nov. 29, 2011||The ratings on WFC reflect its very strong business position, adequate capital and earnings, strong risk position, average funding, and adequate liquidity, compared with its peers'.|
|U.S. Bancorp||A/Stable/A-1||A+/Stable/A-1||Dec. 6, 2011||The ratings on USB reflect its very strong business position, adequate capital and earnings, strong risk position, average funding, and adequate liquidity.|
|Morgan Stanley||A-/Negative/A-2||A/Negative/A-1||Nov. 29, 2011||The ratings on Morgan Stanley reflect its strong business position, adequate capital and earnings, moderate risk position, average funding, and adequate liquidity.|
|PNC Financial Services Group||A-/Stable/A-2||A/Stable/A-1||Dec. 6, 2011||The ratings on PNC reflect its strong business position, adequate capital and earnings, strong risk position, average funding, and adequate liquidity, compared with its peers'. The ratings on PNC would not benefit from any potential extraordinary government support in a crisis.|
|Northern Trust Corp.||A+/Stable/A-1||AA-/Stable/A-1+||Dec. 6, 2011||The ratings on NTRS reflect its very strong business and risk positions, as well as its adequate capital and earnings compared with other U.S. banks'.|
|State Street Corp. (STT)||A+/Negative/A-1||A+/Stable/A-1||Nov. 29, 2011||Standard & Poor's Ratings Services affirmed the ratings and revised the outlook to negative. The company's fundamental trends are stable, and the negative outlook reflects the outlook on the U.S. sovereign rating. We incorporate a one-notch uplift into our ratings on STT based on our expectation for extraordinary U.S. government support.|
|Bank of New York Mellon Corp||A+/Negative/A-1||AA-/Stable/A-1+||Nov. 29, 2011||The ratings on BK reflect the company's stable fundamental trends, very strong business position, strong risk position, and moderate capital, compared with other U.S. banks.|
|*These rating changes took place in fourth-quarter 2011 following Standard & Poor's revision of its bank criteria.|
|Matthew Albrecht, CFA||New York||(1) 212 email@example.com|
|John K. Bartko, CPA||New York||(1) firstname.lastname@example.org|
|Kenneth Frey, Jr., CFA||New York||(1) 212 email@example.com|
|Stuart Plesser||New York||(1) 212 firstname.lastname@example.org|
|Barbara Duberstein||New York||(1) 212-438-5656||Barbara_duberstein@standardandpoors.com|
Related Criteria And Research
- U.S. Mortgage Servicers' $25 Billion Settlement Shouldn't Affect Ratings, Feb. 10, 2012
- U.S. Bank Loans: Battling Back From The Recession As Growth Remains Weak, Feb. 7, 2012
|Primary Credit Analyst:||Matthew Albrecht, CFA, New York 212-438-1867;|
|Secondary Contacts:||Barbara Duberstein, New York (1) 212-438-5656;|
|Carmen Y Manoyan, New York (1) 212-438-6162;|
|Research Contributor:||Shameer Bandeally, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P’s opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.