Credit Suisse believes US large banks’ revenue could face challenges thanks to low rates, relatively sluggish loan growth and declining mortgage banking activity.

Credit Suisse Group AG (NYSE:CS) is optimistic about US large banks’ positioning and risk reduction though the optimism is tempered by challenging revenue outlook.

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse Group AG (NYSE:CS) in their recent research report on US large banks point out that during the fourth quarter, the large banks’ revenues were relatively stable, though mixed trends were witnessed in their fee income.

Weak mortgage revenues

The Credit Suisse analysts point out that US large banks’ revenues were flat quarter-on-quarter, with mixed trends witnessed in their fee income.

The US large banks’ spread income grew 1% on quarter-on-quarter, as can be deduced from the following table:

Spread income

The revenues were flat on quarter-on-quarter basis and down 4% on year-on-year basis, as highlighted in the table below:

Revenues of top US banks

However, the US large banks’ fee income was negatively impacted thanks to declining mortgage banking activity in the quarter. This is evidenced in the following table:

Fee income of top US banks

The banks’ mortgage banking revenues were weak given lower volumes partly offset by improved GOS margins and mixed servicing revenue results. The following graph highlights the mixed servicing revenue and improved GOS margins:

Servicing and GOS margin Big Banks

As can be deduced from the following table, the US large banks’ origination volumes declined 40% quarter-on-quarter and down 57% year-on-year. The Credit Suisse analysts point out that such decline came in worse than their expectations for a 27% quarter-on-quarter decline.

Decline in origination volume

Improved investment banking fees

The Credit Suisse analysts point out that investment banking fees came in better than expected up 29% quarter-on-quarter and up 9% year-on-year driven by equity underwriting and advisory.

Investment banking

As regards net interest margins are concerned, the analysts point out that performance of net interest margins differed by bank and held up better at the capital market sensitive banks, while PNC, USB and WFC all posted quarter-on-quarter declines in the NIM. The analysts believe, in general expectations call for continued modest NIM pressure going forward. The following table captures the declining NIM performance posted by PNC, USB and WFC:

Net interest margin

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse Group AG (NYSE:CS) anticipate the large banks to grind out 10% EPS growth, on average in 2014. They believe that the banks best positioned are those institutions that can grow revenues, effectively manage expenses and deploy capital. The Credit Suisse analysts rank Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) on the top of this list.