U.S. Banks Webinar 2Q 2023: An Uphill Climb As Funding Costs Rise

U.S. banks' net interest income (NII) will likely tick down each quarter as deposit and funding costs increase. We expect NII to rise by 7%-8% for the full year given the sharp increase last year, but to fall in 2024. In our base case, we expect an industry return on equity of about 11% for 2023, modestly down from last year. We expect delinquencies and charge-offs to continue inching higher, at least toward historical averages, on pressures from higher interest rates, declining savings among some consumers, and slow economic growth. Deposits will continue falling as long as the Federal Reserve is raising rates and quantitatively tightening, increasing competition for funding and raising the cost of funding.

...Net interest income (NII) will likely tick down each quarter as deposit and funding costs increase. We expect NII to rise by 7%-8% for the full year given the sharp increase last year, but to fall in 2024. Fee income may remain tepid until mortgage banking and investment banking pick up. Banks will keep focusing on expenses, consolidating branches, and digitizing. However, continued inflation and investments in technology will raise expenses further. In our base case, we expect an industry return on equity of about 11% for 2023, modestly down from last year. Greater-than- expected provisions, funding costs, or expenses could reduce that somewhat. Profitability could decline next year on lower NII unless fee income picks up. We expect delinquencies and charge-offs to continue inching higher, at least toward historical averages, on pressures from higher interest rates, declining savings among some consumers, and slow economic growth. Commercial real estate will be one of the largest challenges...

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