Banks: Q1 2024 earnings season themes

Credit quality

The significant decline in New York Community Bancorp’s (NYCB) stock price following its Q4 2023 earnings report further increased the concern around asset quality for regional banks, particularly in the multifamily sector. However, NYCB’s issues are largely unique to that bank given its significant exposure to rent-controlled properties in its multifamily portfolio. Management teams should be prepared to speak to the level of exposure their banks have to rent-controlled properties in their multifamily portfolios, and if they have no exposure, it would be worth proactively providing this information during Q1 2024 earnings calls. Along with multifamily, office CRE remains a concern and investors and analysts will likely be looking for updates on the performance of these loans, and if there is a meaningful amount of loans maturing this year that won’t be renewed due to the loans no longer meeting LTV and DSC requirements. There will also likely be interest in how commercial borrowers are handling higher rates as their loans reprice and if any are having difficulty in servicing their higher debt payments now, as well as if banks are making more loan modifications to assist borrowers who are struggling in the current environment. 

Interest rate sensitivity

Over the past couple of months, the expectations for when the Fed would start cutting rates has shifted to later in 2024 and the number of rate cuts expected to occur in 2024 has been reduced. As a result, interest rate sensitivity will continue to be a primary area of interest and how banks are positioned to manage through a “higher for longer” rate environment that looks like it could materialize.

Loan growth

Across the banking industry, C&I line utilization rates increased during Q4 2023, but commentary from some banks during the first quarter indicated that utilization rates were declining and presenting a headwind to loan growth. Analysts and investors will be interested in hearing about the line utilization trends that banks experienced during the first quarter and if they think declining utilization rates could present a stronger headwind to loan growth until the Fed starts to reduce interest rates. In terms of new loan production, analysts and investors will want to understand any changing trends banks are seeing in loan demand and if they are able to still meet loan growth targets without compromising on their pricing and underwriting criteria.

Deposit trends

Trends in deposit flows, mix, and pricing continue to be an area of interest for analysts and investors, and banks should be prepared to speak to any seasonal inflow/outflow trends that impacted them in the first quarter. Banks with high levels of liquidity in terms of low loan-to-deposit ratios and/or high levels of cash balances should be prepared to speak to how they intend to utilize their high level of liquidity to manage funding costs by letting higher cost deposits leave the bank and/or by reducing higher cost borrowings. As always, if banks are having success in attracting new commercial relationships that bring noninterest-bearing deposits, they should highlight this success on first quarter earnings calls, and when possible, quantify the success they are having by providing the total amount of new noninterest-bearing deposits added during the quarter.

Expense levels

M&A

While M&A activity is still relatively muted, we continue to see some banks taking advantage of the current environment to enter into transactions that they believe will strengthen their franchises and create long-term value for shareholders. 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 are more favorable, their valuation increases and their currency improves, and/or some of the current challenges to doing transactions, such as interest rate marks, abate. 

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