US banks warn of weaker interest income in 2024

Bank interest income: Several US banks issued warnings of anticipated lower interest income for the current year, concluding a week of pessimistic statements within the industry grappling with elevated deposit costs. Following a period of robust profits driven by high loan interest rates, banks now confront various challenges in 2024, including subdued loan growth and potentially more stringent capital regulations.

Potential rate cuts from the Federal Reserve later in the year might alleviate some pressure on banks to further increase deposit costs. However, some policymakers within the central bank caution that sustained elevated rates might be necessary to bring inflation down to the 2 per cent target.

Rita Sahu and Megan Fox, banking credit analysts at Moody's, noted, "We continue to see rising deposit costs. Barring an end to quantitative tightening and significant rate cuts, banks will face deposit pressures."

On Friday, Regions Financial, Fifth Third Bancorp, State Street, and Comerica joined their peers in cautioning about lower net interest income (NII) in 2024. Profits at these banks also decreased due to a one-time charge related to the special assessment fee for refilling the Federal Deposit Insurance Corp's deposit insurance fund.

The KBW Regional Banking Index has experienced a 2.5 per cent decline this week. Macrae Sykes, portfolio manager at Gabelli Funds, commented, "For some banks struggling with high-cost funding, lower rates may help spread dynamics. In general, higher rates and a steep yield curve are good for banks."

Huntington Bancshares offered a more optimistic outlook, forecasting that its 2024 NII could either rise or fall by 2 per cent from 2023 levels, in contrast to Wall Street expectations for a nearly 1 per cent drop. The bank anticipates its NII to reach a trough in the first quarter before expanding over the rest of the year, with an expected average loan growth of 3 per cent to 5 per cent. Notably, Huntington Bancshares has a more evenly split loan book between retail and business customers, providing a potential advantage compared to its peers. However, in the fourth quarter, its NII experienced a 10 per cent decline.

(With Reuters inputs)