- U.S. Banking fundamentals remain in the spotlight in 2024 after SVB’s failure brought a frenzied and then sustained focus on the sector. While concerns over deposit outflows and bank runs has abated, there’s still an elevated level of caution on the industry with investor concerns ranging across credit risk assets like CRE or consumer loans to interest rate risk positioning and profitability.
- We remain solidly constructive on sector fundamentals and the operating risk backdrop, seeing a sound overall picture for the banks into 2024. Some aspects will deteriorate (loan losses), some will likely improve (margins), but on balance we see the highly cyclical sector as strong and well-positioned for a range of outcomes; profitability is still healthy especially on a balance sheet risk-adjusted basis, liquidity solid and improving, capitalization good and increasing organically and with lower rates, and existing reserves already account for something worse than a base case economic scenario.
- We go into greater detail on several top-level bank investor fundamental concerns in 2024, including consumer credit, commercial real estate, margins and profitability, interest rates and regional banks, loan growth, and the outlook for capital markets.
2024 U.S. Banks Outlook: Fundamental Focus
Fundamentals mattered (sort of) in 2023 as the failure of Silicon Valley Bank kicked off a frenzy of pencil sharpening that persisted throughout the rest of the year—and not just around uninsured deposits, as broader fundamental credit concerns percolated ranging from NIMs and profitability to specific asset class exposure (CRE, consumer). Banks certainly weren’t boring.
Looking ahead to 2024, we continue to see a sound overall fundamental picture for U.S. banks: as cyclical creatures, downside risk management is paramount and the sector continues to enjoy healthy liquidity, capitalization, and profitability especially when considering asset mix risk. Which is not to say there aren’t pressures—liquidity and capitalization remain in focus as long as securities books are underwater, while the rate environment and continued upward deposit repricing could lead to incremental margin pressure. And then there’s credit risk, with the jury still out on hard vs. soft landing even as loss rates approach pre-pandemic levels.
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On balance, we remain quite constructive on U.S. bank fundamentals and the operating backdrop—especially from a cyclically adjusted perspective. Below we go into more detail and the necessary nuance on a wide variety of top-level bank investor concerns in 2024 including consumer credit, commercial real estate, margins and profitability, rates and regional bank credit profiles, investment banking and trading, loan growth, and reserve positioning.
We’re not sure where (or if) the market narratives on consumer credit have shifted since the sharp turn in interest rates reflecting more of a ‘soft landing’ market view, but regardless: we remain fundamentally constructive. Below, we run through some of the bear headlines and storylines we heard throughout 2023, providing our own (more constructive) takeaways and expectations heading into 2024.
“Credit Card Debt Reaches All-time High”
Outstanding card debt surpassed the previous record high in 4Q22, eventually passing the $1 tn mark in mid-2023. But there’s a lot of context missing in that nominal number, including inflation and consumer spending—credit cards are inextricably linked to consumption, in no small part due to the heavy presence of transactor behavior. As we can see in the embedded chart, a simple inflation adjustment paints a very different picture, one where credit card balances have only just recovered to their pre-pandemic peak (4Q19 was also an “all-time high”). And as shown in the chart below, adding spending context further points to a fairly healthy consumer—a consumer that has incrementally relied on credit to support spending in the COVID recovery, but still not to the same pre-pandemic degree and far off the pre-financial crisis trends.
Another important piece of the card puzzle is cohort: the surge in account openings often goes under-discussed, and a major factor in the run-up in card balances the past few years. That’s an important piece of context, as more card holders means more card balances but not necessarily more individual leverage. Candidly, we’re not entirely sure what’s behind the rapid growth in card accounts in recent years—beyond marketing blitzes from the issuers—but it’s notable that it took us 11 years to get back to the financial crisis peak in open accounts, and just 2 pandemic years to grow 20%. What that means is that even though nominal card debt of $1.08 tn is at an ‘all-time high’, average balances are right around pre-pandemic levels and 10% lower than the GFC-era peak—and that’s without any inflation adjustment.