OREANDA-NEWS. Healthy capital and liquidity levels, still benign asset quality and generally improving profitability, albeit below pre-crisis levels, contribute to a stable 2016 ratings and sector outlook for U.S. banks, according to Fitch Ratings' 2016 U.S. Banks Outlook Report.

"Even with steady capitalization levels, U.S. bank earnings will be challenged next year due to economic headwinds and the strengthening dollar," said Christopher Wolfe, Managing Director Financial Institutions at Fitch Ratings. "As banks grapple with the cost of regulation and soldier on in the lower-for-longer interest rate environment, banks' net interest margins and profitability will be pressured, which we expect to lead to M&A in 2016. "

The pace of industry consolidation will increase in 2016 due to the need for greater scale efficiencies from costly compliance with financial regulation, technology investments, and the prolonged low interest rate environment not being sufficient enough to improve profitability. Achieving scale is even more important, as banks will have fewer reserve releases to flatter the earnings picture in 2016.

Even as interest rates rise, the slow and incremental increase will not be enough to boost profitability for banks in a meaningful way in the short term. Bank earnings growth is expected to be somewhat muted given the expectation of rising provision expenses, limited improvement to margins over the next 12 months, and continual compliance and regulatory-related investments.

It is Fitch's view that the bank regulatory agenda is nearing completion and bank management teams will prioritize implementation and compliance in the years ahead. Fitch expects that U.S. and foreign bank-owned entities will have sufficient time to comply with new structural, capital and liquidity rules ahead of schedule.

New market entrants including "digital wallets" and technological advancements such as "block chains" from non-bank competitors will continue to threaten banks in 2016. Non-bank lenders do not have to comply with full and costly bank regulation and, as online lenders, do not have to contend with the physical costs of retail branches. Some more traditional banks are trying to overcome the competitive threat by partnering with marketplace lenders, a trend that will likely continue in 2016.