S&P Global Market Intelligence U.S. Bank Market Report Finds Earnings are Expected to Fall 2.8% year-over-year in 2024, but Rebound Strongly in 2025

Rhea-AI Summary

S&P Global Market Intelligence's U.S. Bank Market Report predicts a 2.8% year-over-year decline in U.S. bank earnings in 2024 due to higher credit costs, but a strong rebound is expected in 2025.

Positive

• Higher credit costs are expected to impact U.S. bank earnings negatively in 2024.
• Earnings are forecasted to dip 2.8% year-over-year, excluding gains from failed bank acquisitions in 2023.
• Deposit competition remains fierce, with banks focusing on deposits amid regulatory pressures and higher interest rates.
• Bank credit quality is anticipated to weaken in 2024 and 2025, primarily due to higher delinquencies and losses in commercial real estate portfolios.
• Regulators emphasize the importance of strong risk management for banks with elevated commercial real estate concentrations.
• Earnings are expected to rebound strongly in 2025 and 2026 as provisions for loan losses decrease.
• Investors may be attracted to banks with superior credit quality and strong earnings streams for potential growth and acquisitions.

Negative

• Higher credit costs and margin pressure are expected to prevent earnings growth in 2024.
• Bank credit quality deterioration may impact earnings but is not seen as a threat to safety and soundness for most institutions.

Insights

Financial Analyst

The decrease in earnings projected for U.S. banks, attributed mainly to higher credit costs and margin pressure, is an early indicator of a tightening credit environment. Banks are facing interest rate challenges, as customers seek out higher yields and regulatory demands for liquidity increase, both factors potentially squeezing net interest margins. When rates are expected to fall, as forecasted for the latter half of 2024, banks could see some relief, albeit offset by credit costs tied to commercial real estate exposure. The subsequent expected rebound in 2025 and 2026 highlights the cyclical nature of banking earnings and underscores the importance of strong credit quality management. For investors, the differentiation between banks may become pronounced, as those with superior credit management will likely emerge stronger, potentially offering better investment opportunities.

Risk Management Expert

The emphasis on commercial real estate (CRE) portfolio management noted in the U.S. Bank Market Report aligns with a broader risk management focus. Elevated CRE concentrations can be a double-edged sword, offering significant returns but also presenting concentrated risk, as highlighted by the anticipated increase in delinquencies and losses. The strategic importance of robust risk management practices is evident, with some banks potentially facing independent capital requirements as a preemptive measure. This indicates a regulatory trend towards a more conservative stance in anticipation of a downturn, which could shape capital allocation strategies and risk appetite. From an investment perspective, banks that effectively navigate these complexities could provide a measure of resilience in portfolios.

Market Research Analyst

Deposit competition and regulatory pressures are central themes impacting the future of U.S. banking. The S&P report's projection that fierce deposit competition will persist speaks to the competitive landscape of the industry. Banks valuing deposits highly can be seen as a strategic move to secure a stable funding base amidst market volatility. Investors should monitor deposit growth rates and cost of funds as indicators of a bank's competitive standing and operational efficiency. As interest rates stabilize and credit challenges are absorbed, banks with an ability to attract and retain customer deposits while managing costs may be positioned for growth, attracting investor interest in the subsequent years.

NEW YORK, April 16, 2024 /PRNewswire/ -- Higher credit costs are expected to serve as a modest headwind to U.S. bank earnings this year, according to S&P Global Market Intelligence's newly released U.S. Bank Market Report. U.S. bank earnings are expected to dip 2.8 percent year-over-year, excluding the purchase gains associated with the three failed bank acquisitions in 2023, as modest margin pressure and notably higher credit costs prevent earnings growth.

"Even as interest rates are expected to fall in the second half of 2024, deposits remain firmly in focus for U.S. banks," said Nathan Stovall, director of financial institutions research, S&P Global Market Intelligence. "Customers continue to shift funds into higher-cost products and demand higher rates for their funds, while regulators are encouraging banks to hold more liquidity, leading to pressure on net interest margins. That pressure will eventually subside but will be replaced by higher credit costs, particularly as banks begin to recognize losses on their commercial real estate portfolios and reserve for future problems."

Earnings should rebound strongly for most institutions in 2025 and 2026 as institutions weather the credit cycle, absorb losses and record lower provisions for loan losses. This in turn could bring many investors back to the banking group, and banks whose credit quality outperforms others should attract even greater investor interest as they will boast even stronger earnings streams that allow them to play offense through organic growth and by using their superior currency for acquisitions.

Key highlights from the report include:

• Fierce deposit competition should persist amid regulatory pressures and higher-for-longer interest rates as banks place a higher value on deposits than other forms of funding.
• Bank credit quality is expected to weaken in 2024 and 2025, led by higher delinquencies and losses in the commercial real estate (CRE) portfolios, but the deterioration will serve as a hit to earnings rather than a threat to safety and soundness for most institutions.
• Regulators have reiterated the importance of banks maintaining strong risk management of their CRE portfolios, particularly for institutions with elevated CRE concentrations. In some cases, regulators have imposed independent minimum capital requirements for banks with elevated CRE concentrations.
• U.S. bank earnings are expected to rebound strongly in 2025 and 2026 as provisions for loan losses decline and become a much smaller headwind to earnings.

To request a copy of the 2024 U.S. Bank Market Report, please contact press.mi@spglobal.com.

S&P Global Market Intelligence's opinions, quotes, and credit-related and other analyses are statements of opinion as of the date they are expressed and not statements of fact or recommendation to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.

About S&P Global Market Intelligence

At S&P Global Market Intelligence, we understand the importance of accurate, deep and insightful information. Our team of experts delivers unrivaled insights and leading data and technology solutions, partnering with customers to expand their perspective, operate with confidence, and make decisions with conviction.

S&P Global Market Intelligence is a division of S&P Global (NYSE: SPGI). S&P Global is the world's foremost provider of credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help many of the world's leading organizations navigate the economic landscape so they can plan for tomorrow, today. For more information, visit www.spglobal.com/marketintelligence.

Media Contact 
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S&P Global Market Intelligence  
+1 781 301 9311
katherine.smith@spglobal.com 

 

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SOURCE S&P Global Market Intelligence

FAQ

What is the expected decline in U.S. bank earnings in 2024 according to the S&P Global Market Intelligence report?

U.S. bank earnings are expected to fall by 2.8% year-over-year in 2024.

Why are higher credit costs considered a headwind for U.S. bank earnings in 2024?

Higher credit costs are expected to impact U.S. bank earnings negatively in 2024, preventing earnings growth.

What is the focus of U.S. banks amid regulatory pressures and higher interest rates?

U.S. banks are placing a higher value on deposits than other forms of funding due to regulatory pressures and higher interest rates.

Why is bank credit quality expected to weaken in 2024 and 2025?

Bank credit quality is anticipated to weaken in 2024 and 2025 due to higher delinquencies and losses in commercial real estate portfolios.

What is emphasized by regulators for banks with elevated commercial real estate concentrations?

Regulators stress the importance of strong risk management for banks with elevated commercial real estate concentrations.

How are earnings expected to change in 2025 and 2026?

Earnings are projected to rebound strongly in 2025 and 2026 as provisions for loan losses decrease.

What may attract investors to certain banks according to the report?

Investors may be attracted to banks with superior credit quality and strong earnings streams for potential growth and acquisitions.