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-US community banks face challenges, according to Fitch Ratings.

M2 EQUITYBITES-June 14, 2013--US community banks face challenges, according to Fitch Ratings(C)2013 M2 COMMUNICATIONS

14 June 2013 -- New York-based ratings agency Fitch Ratings said it expects challenges ahead for its rated community bank peer group, given the low interest rate environment and increased regulatory costs, as discussed in a new report.

According to Fitch, the banking industry is generally facing significant challenges given the slow economic recovery, the prolonged low interest rate environment, increased burden from regulatory-related costs and impacts from Dodd-Frank bill.

However, in Fitch's opinion, these operating challenges may affect community banks more severely than global trading banks, and large regional banks, which are more diversified, benefit from economies of scale and are typically price leaders in their operating markets.

Fitch views community banks' simplistic balance sheets as a positive attribute. They experience minimal earnings volatility and financials are transparent and less complex.

These banks are less susceptible to negative impacts from market volatility given their focus on traditional types of lending. Further, the more manageable organizational structure bodes well for controlling risk profile and appetite for most community banks.

Nonetheless, Fitch believes the prolonged low rate environment and flat yield curve will continue to pressure earnings. Although true for all banks, Fitch believes community banks will be disproportionately affected owing to the lack of revenue diversity and their reliance on spread income.

Fitch also notes that community banks' loan mixes are heavily weighted towards real estate lending, particularly commercial real estate, when compared to larger peer groups.

As such, community banks have looked to diversify their loan mixes at a time when competition is fierce for commercial and industrial lending across the banking industry. Although Fitch said it recognises the improvements to loan concentrations, Fitch is concerned at the pace of growth and competition for C&I loans.

Furthermore, C&I is a newer lending area for some banks, and some may lack the expertise, appropriate platform and/or risk management processes to offset potential credit issues. To date, Fitch has not seen credit trends in C&I to suggest credit deterioration is looming, but anecdotally banks have alluded to aggressive competition in terms of price and structure.

The full report 'U.S. Banks: Community Bank Review -Pressures Likely To Persist Special Report ' is available at

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Date:Jun 14, 2013
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