More than half of the 17 largest banks or investment banking firms in the United States posted lower over-the quarter incomes in Q4 2015 due to such factors as market volatility, interest rate uncertainty, and pressures in oil and gas, according to a release from Fitch Ratings on Thursday.
One of the factors that offset these factors was a moderation in litigation costs stemming from mortgage-backed securities, as was the case with Bank of America and Morgan Stanley—both of which reported substantial gains in their profits for Q4 with costs stemming from multi-billion dollar RMBS settlements largely in the rear view mirror. One notable exception to this was Goldman Sachs, which saw a decline of about 50 percent in net earnings over-the-quarter and about 67 percent year-over-year in Q4 due to a fresh $5.1 billion settlement reached in January 2016.
Incremental income growth and very benign credit costs were other factors that offset the market volatility, interest rate uncertainty, and oil and gas pressures, according to Fitch. According to the Fitch report, 11 of the 17 largest financial institutions posted lower over-the-quarter net incomes in Q4.
The precipitous drop in oil prices that has continued into 2016 has resulted in many of the banks reporting further loan loss reserve builds, because banks cited exposure to oilfield services and exploration and production companies as higher risk segments. Banks have benefited greatly from reserve releases in recent years, according to Fitch, but Q4 net earnings were affected by related provisioning even though the banks’ direct exposure to oil and gas pressures was fairly modest.
Fitch noted that it expects to see some price recovery in the oil industry—specifically, the agency expects oil prices to jump from $30 a barrel to about $45 a barrel in 2016 and $55 a barrel in 2017. There is still a great deal of regulatory uncertainty regarding oil prices for the banking sector, according to Fitch.