Banks: Q3 2023 earnings season themes

Economic outlook

While many economists still expect a recession to occur at some point over the next year, the timing, depth and duration of the potential recession remain uncertain. Many banks began tightening underwriting criteria and becoming more conservative on new loan production during 2022 in anticipation of a potential recession. With the anticipated recession yet to occur, and the timing of when a recession might begin remaining uncertain, investors and analysts will be interested in hearing if management teams have made any changes to their approach to new loan production and if they have sufficient confidence in the economic resiliency of their markets to increase their volume of loan production.

Deposit trends

Deposit flows and pricing continue to be areas of interest for analysts and investors. There will be interest around whether deposit flows have stabilized, 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 over the remainder of the year, and how much additional pressure this will put on deposit costs as these time deposits renew at current rates.

Excess liquidity

While many banks reduced the excess liquidity they added through the use of borrowings and/or short-term brokered deposits during the second quarter, other banks continued to maintain the excess liquidity despite the negative impact it had on their net interest margins. For those banks that maintained the excess liquidity at the end of the second quarter, investors and analysts will be interested in seeing if they continued to maintain it through the end of the third quarter and if they have reached a point where they feel comfortable enough with deposit trends to start reducing the excess liquidity and eliminating one of the factors driving margin compression.

Credit quality

While asset quality generally held up well during the second quarter, there have been a few notable announcements by banks during the third quarter regarding some larger loans that are expected to result in a meaningful level of charge-offs. Office CRE loans remain a primary area of concern, while more interest is growing in the trends banks are experiencing in construction and development, consumer, and small business loans. Analysts and investors may also be interested in seeing if management teams are starting to make greater use of loan modifications to assist borrowers with term extensions, interest rate reductions, payment deferrals, etc. as part of their approach to managing credit through this period.

Interest rate sensitivity

As speculation continues about when the Fed will stop raising rates and/or start cutting rates, analysts and investors are interested in how banks are managing their interest rate sensitivity and if they are moving to a more neutral or liability-sensitive position. They will also be interested in understanding if banks are utilizing hedges to adjust their interest rate sensitivity.

Securities portfolios

Many banks have already executed on repositioning strategies in their securities portfolios to take advantage of the higher yields now available as they believe the EPS accretion is enough to warrant the one-time loss incurred. Investors and analysts will be interested in understanding if these banks intend to do additional repositioning in their securities portfolios, as well as seeing if those banks that have not yet executed on repositioning strategies are planning to do so in the near future.

M&A

Over the past few months, we have started to see an increase in M&A activity. Given the increase in activity, 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. 

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