Earnings for US banks during the final quarter of last year declined vis-à-vis the fourth quarter of 2021, with Fitch Ratings recently attributing the fall to banks’ continuing to build loan loss reserves (LLRs), driven by strong loan growth, normalizing credit losses and weaker economic outlooks that reflect higher levels of unemployment. That said, strong net interest income (NII) growth and net interest margin (NIM) expansion partially offset higher loss provisions in the quarter, with many lenders registering double-digit loan growth. According to Fitch, however, these trends are expected to moderate in 2023.
The US bank-earnings season also saw share prices for many major American lenders markedly decline off the back of funding pressures triggered by deposit outflows, higher costs of funds and net interest margin pressures. According to S&P Global Market Intelligence, of the nine US banks that posted negative double-digit stock returns either on the same day of their earnings announcements or the day after, “the majority reported a higher cost of funds and a lower net interest margin quarter over quarter”. Investors were not keen on high levels of deposit outflows, rising deposit costs and net interest margin pressures in the quarter, S&P added.
Fitch noted in a separate report covering the eight major Mexican banks with a combined 79.3 percent of Mexico’s total banking assets (at 84.4 percent of loans and 82.6 percent of deposits) that those lenders have remained resilient since the outbreak of the COVID-19 pandemic, with profitability, capitalisation and liquidity levels in 2022 remaining higher than the pre-pandemic years. The rating agency also concluded in December that Mexican banks’ financial performances in 2022 were among the strongest in the past 10 years, mainly due to Mexico’s robust economic recovery and increased private consumption, which resulted in the return of double-digit loan growth, mainly in consumer lending.
Canadian banks’ dealmaking declined by 39.7 percent last year to US$89.7 billion—on a percentage basis, exceeding the 36-percent drop in global deals recorded by Dealogic to US$3.8 trillion. But Canadian banks have yet to announce any significant layoffs, with some reports suggesting that a few might even increase headcounts, even though dealmaking in 2023 thus far has declined by almost 50 percent to US$3.2 billion from this time a year ago. Indeed, the country’s biggest bank, Royal Bank of Canada, saw the headcount in its capital-markets unit rise by a hefty 71 percent to 6,887 employees during the two years to October 31, 2022.
A recent assessment by Moody’s found that Brazilian lenders are set to boost their bad-loan provisions to account for the bankruptcy process of Americanas SA, which in January disclosed a gap in its accounting related to financing for suppliers of around 20 billion reais ($3.9 billion). The retailer has since announced a total debt of 41 billion reais, and the court has granted it protection from creditors while it develops a reorganisation plan.
But Moody’s has noted that the banks, including Itaú Unibanco, Banco Bradesco, Banco Santander (Brasil), Banco do Brasil, Banco BTG Pactual, Banco ABC Brasil and others, account for 97 percent of Americanas’ debt and are likely to include initial provisions for this debt in their fourth-quarter financial statements. The rating agency also added that Brazilian banks have been previously conservative in provisioning for bankruptcies and that Banco Bradesco has the largest exposure in total lending to the retailer, at 4.8 billion reais. However, this amounts to only 0.7 percent of Bradesco’s gross loans, as Moody’s noted. The highest exposure as a percentage of gross loans is held by BTG Pactual, at 3.1 percent.
With inflation running close to 100 percent and its largest denomination bill reportedly worth less than $3, Argentina’s lenders are struggling to store banknotes within their existing physical capacities. Several lenders, including Banco Santander’s local unit and Banco Galicia, are installing additional vaults. Galicia already increased its number of vaults from two in 2019 to ten in 2022 and plans to open two new vaults this year for cash storage, enabling the lender to expand its storage capacity by 30 percent to $164 million in 100 pesos bills.
The Central Bank of Chile’s president has pushed back against suggestions that interest rates will begin to be sharply cut from April onwards, after they were kept unchanged in late January for the second consecutive meeting at 11.25 percent. According to the central bank’s chief, Rosanna Costa, inflation remains “extraordinarily high”. Thus, it will require more time to ensure price growth is moderating towards the central bank’s inflation target before it can consider easing monetary policy.
Costa must navigate monetary policy in an economy that has experienced massively surging prices following the injection of billions of dollars during the pandemic. The stimulus package triggered a major consumption boost that sent inflation soaring to more than 14 percent by mid-2022. “As long as we don’t have greater clarity regarding whether inflation’s convergence to target is effectively taking place, the key rate will be maintained steady,” Costa told Bloomberg. “We have inflation that’s extraordinarily high, and it’s important to have that prior diagnosis before changing the bias in policy.”
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