Banks: Q3 2024 earnings season themes

Impact of Fed rate cut:

Following the 50 basis point cut by the Fed in mid-September, investors and analysts will be interested in hearing about how loan demand and deposit pricing are being impacted at banks. In terms of loan demand, they will want to know if banks are seeing an increase since the rate cut and if utilization rates on existing lines of credit are starting to increase with the rate on variable rate loans now being lower, which would positively impact loan growth. In terms of deposit pricing, they will want to know if banks have been able to lower rates on deposits and to what degree they have been able to do so without seeing any deposit runoff.

Loan growth:

Across the industry, loan growth, while still minimal, increased during the second quarter, with many banks indicating they expected the trend to continue in the second half of the year. Investors and analysts will be interested in seeing if this trend did in
fact continue in the third quarter, and if so, which particular sectors or asset classes are seeing stronger demand, and if banks are able to generate a higher level of loan production and loan growth without compromising on pricing and underwriting criteria. There will also be interest in any revisions to loan growth targets for the full year given the Fed rate cut in mid-September, and if loan pipelines are starting to increase.

NIM Trends:

Across the industry, most banks saw NIM expansion in the second quarter, due to a combination of an increase in earning asset yields and a moderation in the level of increase in deposit costs. Many banks that experienced NIM expansion in the second quarter indicated that they expected the trend to continue in the second half of the year. In addition to seeing if the expected NIM expansion in the third quarter materialized, investors and analysts will be interested in understanding how banks expect the Fed rate cut in mid-September to impact their net interest margin going forward, and if reduction in deposit costs will outweigh any reduction they see in the average loan yields due to lower rates on new loan originations and variable rate loans repricing lower.

Credit quality:

As has been the case for several quarters, there will be a great deal of interest in the trends that banks are seeing in credit quality and any increases they are seeing in net charge-offs and migration into criticized/classified assets. It’s likely that the focus of investors and analysts will continue to be on areas of concern such as central business district office CRE, multifamily (particularly in certain metro markets where a significant amount of new supply is being added), certain healthcare-related properties, including skilled care and nursing homes, syndicated loans, SBA loans, equipment leases, small business loans, and consumer loans. With interest rates starting to come down, there will be interest in knowing if banks expect this to result in loan upgrades as borrowers with variable rate loans see their level of interest expense decline. There will also be interest in understanding if an increase in the allowance level is being driven by specific trends in the portfolio or if it is related to the bank being prudent and increasing its reserves to reflect broader economic conditions.

Fee income trends:

Overall, it has been a challenging environment for many areas of fee income for banks in 2024. However, the environment for some areas may have improved recently, including mortgage banking and wealth management. Mortgage rates have declined recently and there will be interest in seeing if this has resulted in an increase in mortgage demand for both purchase and refinancing and generating a higher level of gain on sale income, as well as growing pipelines for residential mortgages. With the positive market trends during the third quarter, banks with wealth management businesses should see an increase in fee income in this area from the resulting increase in assets under management unless they have seen outflows from clients.

Capital utilization:

With interest rates coming down, many banks should see improvement in AOCI that positively impacts their capital ratios. Given the increase in capital ratios, investors and analysts will be interested in knowing if banks will be more open to utilizing capital for purposes like repurchasing shares, increasing the dividend, redeeming preferred stock, and making acquisitions, or if banks feel the need to maintain higher capital levels until there is more certainty that the economy will avoid a recession.

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