Fitch Ratings reported the Q4/15 results for U.S. banks showed generally lower net income affected by market volatility, interest rate uncertainty and pressures in oil & gas (O&G). Incremental spread income growth, still very benign credit costs and moderation in large litigation-related builds (excluding Goldman Sachs) offset these trends.

Results for the largest 17 U.S. banks were generally lower on a linked-quarter basis, with 11 reporting decreased net income sequentially. Given the prolonged low interest rate environment and relatively weak economic trends, absolute earnings remain relatively lackluster, with a return on assets, on average, of less than 100 bps, well below pre-financial crisis levels.

Following the precipitous drop in oil prices last year that has accelerated into the new year, many of the banks reported further loan loss reserve builds. Exposure to oilfield services companies and exploration and production companies were cited as higher risk segments for the banks. While direct exposure to O&G for the large banks is fairly modest, the related provisioning still affected reported results, which have benefited greatly from reserve releases over the past few years.

Fitch now expects oil prices to increase to $45 on average in 2016 and $55 in 2017, which marks a large improvement from current prices of around $30 a barrel. We expect some price recovery in the second half of this year as the market nears balance.