Bank Earnings: What to know for 2024

Written by Tony Rossi, CFA | Jan 9, 2024 8:51:00 PM

Looking back at Q4 2023, preparing for 2024

Many banks typically set expectations for the coming year in their fourth quarter earnings calls, and it is likely that management teams’ comments regarding their outlook for 2024 will be the topic of most interest to investors and analysts.

Given the level of uncertainty regarding so many critical issues – such as a potential recession that would impact asset quality, the direction of interest rates, and loan demand or the appetite banks have for new loan production – it is a particularly challenging year to provide forecasts. It would not be surprising to see many banks set a low bar for expectations at the beginning of the year due to the uncertain macroeconomic environment, and then update their forecasts throughout the year as economic conditions evolve.

Looking back at Q4, several earnings season themes come into focus:

Interest rate sensitivity

The likelihood of rate cuts during 2024 has increased, and as a result, analysts and investors will be interested in how banks are managing their interest rate sensitivity and if they are moving to a more neutral or liability-sensitive position.
Or if they believe the Fed will keep rates unchanged, they will be interested in which banks are best positioned for a “higher for longer” scenario in which assets continue to reprice higher while funding costs stabilize.

Credit quality

With deposit rates and flows stabilizing, the primary interest of investors and analysts has shifted towards credit and the impact of a potential recession.
During the third quarter, there was an increase in “one-off” credit issues that resulted in a meaningful level of charge-offs for some banks, and with economic conditions remaining challenging, it is possible that we see a recurrence of these types of “one-off” issues again in the fourth quarter.
Syndicated and Office CRE loans remain the primary areas of concern, while more interest is growing in the trends that banks are experiencing in construction and development, consumer, equipment leasing, and small business loans.

Securities portfolios

During the fourth quarter, we continued to see more banks announcing significant repositioning strategies in their securities portfolios to take advantage of the higher yields now available, and there will be interest in whether banks that have yet to do any significant repositioning are now giving it stronger consideration.
For those banks that have announced repositioning strategies, the market reaction has been largely determined by the bank’s ability to withstand the impact to capital and still have strong capital ratios, as well as the level of EPS accretion.

Deposit trends

While deposit flows and pricing have stabilized for many banks, there will still be interest in understanding the trends that banks are experiencing, such as if unfavorable shifts in deposit mix are continuing as customers move more of their funds to higher interest-bearing accounts, and to what extent banks are still employing brokered deposits as a means to support their liquidity and funding needs.
Management teams should also be prepared to answer questions around the volume of time deposit maturities scheduled during 2024, and how much additional pressure this will put on deposit costs as these time deposits renew at current rates.
There will also be interest in the extent to which funding challenges will impact banks’ appetite for new loan production in 2024.

Expense levels

With 2024 expected to be another challenging year for revenue growth, for both spread income and many fee generating areas, there will be a great deal of interest in banks’ expectations around expense levels for the coming year.
Analysts and investors will want to understand if management teams are proactively taking steps to reduce expenses or trying to minimize expense growth as they continue to invest in certain areas of their businesses that they believe will provide long-term benefits in terms of enhanced efficiencies, increased revenue generation opportunities, and/or improved customer service.

M&A

During the second half of 2023, we saw an increase in M&A activity.
Given the increase, investors and analysts are likely to ask management teams if they are starting to look more closely at M&A opportunities or if they are still in a capital preservation mode and not looking at M&A until economic conditions improve.

Also read: 7 Keys to Communicating an M&A Deal Effectively

What challenges are keeping you up at night? As your team navigates the uncertainties of the new year, please contact us if you can use some assistance.

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