(This statement was made by Fitch Ratings Agency on November 29, 2016)

Link to Fitch Ratings’ Report: 2017 Outlook: U.S. Banks

Fitch Ratings-New York-29 November 2016: Rating and sector outlooks for US banks will remain stable for 2017, backed by strong capital and liquidity and solid asset quality, says Fitch Ratings. Long-running challenges related to improving profitability and conduct risk are expected to remain key issues for the banking sector, although each of these should be manageable within existing ratings.

Fitch expects asset quality to remain solid but to deteriorate for most major bank subsectors in 2017. Mean reversion from unsustainably low nonperforming loan ratios is likely with commercial real estate, auto lending and commercial & industrial loan portfolios particularly susceptible to normalization and mean reversion. Each of these sectors has seen especially rapid lending growth in recent years, and loan loss rates are running well below their long-term averages.

Asset quality weakening should not affect bank ratings or the sector outlook, so long as it remains modest and within historical norms and relative to peers.

Conduct issues will continue to be a major theme and could mitigate the benefits from recent cost efficiencies. In particular, sales practices are likely to continue being a focus for regulators. Fitch believes that conduct risk more broadly will remain a potential rating sensitivity for banks.

An uptick in mergers and acquisitions (M&A) are expected given the low rate environment and continued revenue challenges. Banks below $250bn in assets or near other regulatory asset thresholds are the likeliest to see greater M&A activity.

US banks remain in a fundamentally strong position, despite the persistent challenges. Profitability is a case in point. US banks have struggled to increase profitability in recent years, but it is healthy relative to other regions and, considering that capital has almost doubled over the past six years, weighing on return on equity. Profitability should also improve from expected US rate rises through 2017. On the whole, Fitch expects banks to benefit from a scenario of gradual rate normalization.

Broad upside to US bank ratings is unlikely, with ratings already averaging ‘A-‘ and without any systemic catalyst for upgrades forthcoming.