Loans

Increased focus on interest rate pressures and credit quality ahead of bank profits



interested in Higher interest rate, longer duration and economic activity slowing, analysts expect further pressure on loan profitability Credit quality deteriorates The community bank will report first-quarter earnings later this month.

However, following recent signals from Fed policymakers that a rate cut is imminent this year, analysts also expect comments from bankers on the earnings call to include Optimistic long-term outlook Interest income and credit stability.

The Fed has not raised interest rates since last summer, but after raising the benchmark rate several times in 2022 and early last year, rates have remained near this century high, resulting in higher deposit costs for banks and lower interest payments for borrowers. Higher. Stifling demand for loans and squeezing the gap between banks’ loan income and deposit payments.

Data show that the median net interest spread, a key indicator of profitability in the U.S. banking industry, fell by 3 basis points in the third quarter and 5 basis points in the second quarter of last year. After falling by 5 basis points in the second quarter of last year, it dropped to 3.35% in the fourth quarter, a quarterly decrease of 2 basis points. .Data from S&P Global Market Intelligence.

First-quarter results are expected to show continued downward pressure on net interest margins in the first few months of the year. High interest rates are also discouraging more consumer and commercial real estate borrowers. Credit card costs have soared along with interest rates, making monthly payments higher and more difficult to manage, especially for commercial real estate office properties, which are struggling due to the ongoing remote work trend following the pandemic.

S&P Global data shows that the annualized net charge-off rate in the credit card sector increased 94 basis points to 4.15% in the fourth quarter from the same period last year, which is the highest level since the indicator reached 4.38% in the second quarter of 2019. As of the end of 2023, commercial real estate loans were US$25.26 billion, an annual increase of 79%.

Wedbush analyst David Chiaverini said higher interest rates “will likely continue to weigh on negative credit migration, particularly for banks with excessive exposure to commercial real estate and consumer loans.”

These headwinds, in turn, lead to a slowdown in the economy.

However, as Iron Bay Capital President Rober Bolton said, the industry as a whole will remain profitable in 2023 and is expected to remain so this year. Three rate cuts are possible if the Fed follows what policymakers said in a report following their March meeting.

Bolton said: “So it’s still difficult to predict when exactly the Fed will start taking action, and there’s still a lot of uncertainty about the economic slowdown and what that means in the short term. But in the long term, assuming the Fed does Take action and margins will benefit, and I think there’s good reason to be optimistic about community banks.”

This view is consistent with that of the American Bankers Association Council of Economic Advisers OutlookThe committee, made up of bank economists, expects credit conditions to soften sometime this year as the economy slows and borrowing costs continue to rise.

The committee predicts economic growth of about 1.7% in 2024 and 1.8% in 2025. This year’s forecast will accelerate an already declining pace. Gross domestic product increased at an annual rate of 3.2% in the fourth quarter, slower than the 4.9% growth rate in the third quarter, according to the U.S. Department of Commerce.

Last year, employers collectively reported six-digit job creation gains each month, and that was also seen in January and February this year, albeit at a slower pace.The employer added 275,000 jobs in February,from 353,000 jobs The program was created in January, according to the Labor Department.

In 2023, employers will add an average of 225,000 jobs per month. ABA economists expect that number to slow to 139,000 per month by 2024 and drop to about 117,000 in 2025. The committee expects the unemployment rate to reach 4.1% by the end of 2024, up from 3.9% in February and 3.7% at the end of last year.

Simona Mocuta, chair of the ABA committee and chief economist at State Street Global Advisors, said: “The cumulative effect of still-high interest rates, weak demand, reduced consumer savings and a modest rise in unemployment will lead to Credit quality deteriorated.”

The ABA predicts that bank consumer delinquency rates will rise slightly from 2.8% in 2024 to 2.9% in 2025. That would be higher than last year’s estimate of 2.4%.

But the ABA committee said recession risks have subsided and inflation remains subdued, opening the door for interest rate cuts to begin this summer. The annual rate in February was 3.2%the inflation rate is only one-third of the peak of 9.1% in 2022.

The committee’s view is that the Fed will lower the federal funds rate target range starting in mid-2024, with three 25 basis point cuts by the end of this year, which will help reduce deposit costs and potentially drive stronger loan demand. As loan volumes increase and the cost of financing loan growth decreases, banks can drive stronger net interest income, thereby improving profitability.

Against this backdrop, Piper Sandler analyst Casey Orr Whitman said that across her firm’s coverage, loan growth is slowing throughout 2023 and financing costs are rising, and is likely to be This happened in the first quarter. This hampers margins and, in turn, earnings per share.

Whitman expects first-quarter net interest margin to fall 3 basis points quarter-on-quarter and core earnings per share to fall 7% quarter-to-quarter.

“The continued higher interest rate environment and ongoing economic uncertainty are helping to drive weakness in the near and medium term,” Whitman said.





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