October 29, 2012

The big four universal banks and two large investment banks in the US reported solid results for Q3, driven by a much more friendly capital markets environment than in H1 and by a continuing improvement in the domestic real estate market. Capital generation strongly surprised to the upside, while net interest income (incl. margins) was again a weaker spot. The six banks account for about half of the American banking system and the bulk of investment banking revenues, therefore providing reasonable insights into the health of the entire US market. Net interest income in Q3 was down 5% yoy, with the net interest margin declining by an average of 8 bp to 3.07%. The revival of the housing market meant loan loss provisions were 29% lower than in Q3 11, while loan growth has picked up at most banks. Costs remained well under control and a slump in net income by 40% to USD 12 bn was only due to heavy one-off charges. However, further improvements in operating profitability may be harder to come by with the outlook for 2013 clouded by a potential fiscal cliff and LLPs already the lowest since 2006. With respect to capital levels, US banks are significantly ahead of their EU peers - the Core Tier 1 ratio under Basel III (fully loaded) jumped by an impressive 60 bp qoq to 8.6%! Despite negative newsflow, American institutions in fact slightly increased their exposure to the euro area further during Q2 (according to BIS data), particularly to France, but even to Italy and Spain whereas they pulled some money out of the safe haven Germany (probably driven by extremely low yields on government bonds and bank bonds). The overall growth in Q2 was solely caused by a larger business volume with the private sector, as claims on European governments and banks stayed virtually flat.