U.S. banks should earn a return on equity in the high-single or low-double digits, helped by higher interest rates. After rising close to a projected 20% in 2022, net interest income should increase by more than 10% in 2023, helping banks offset pressure on fee income and expenses. Asset quality, which has been benign, will inevitably worsen with a likely recession, but banks are well positioned to absorb higher provisions. We see sectors within commercial, commercial real estate, and credit card lending as areas of potential weakening. Given profitability expectations, capital will remain in good shape while quantitative tightening by the Fed will likely cause liquidity, which has been historically strong, to weaken toward pre-pandemic levels.
