With more than 30 larger banks having reported 4Q23 results, the general trend is a soft beat to net income expectations with cautious optimism for the 2024 outlook. No substantial improvement is evidenced from the prior quarter Net Interest trends.
Among public U.S. banks with assets greater than $10B, 31 have now reported 4Q23 results with nearly 2/3 beating consensus EPS expectations by a median 1.23%. Median EPS is lower by -6.2% from 3Q and down -21.3% from a year ago. Balance sheets are basically flat from September and up low single digits from the linked quarter. Capital ratios are strengthened by most metrics.
The clear inflection to Net Interest Margin and Net Interest Income has not yet come through results. Roughly 1/3 of reported companies experienced NIM and/or NII expansion in 4Q which is just a modest increase from the prior quarter. Median NIM and NII are lower by -1.6% and -0.9% from September and -9.9% and -8.5% from a year ago, respectively.
Credit quality continues to normalize as Non-performing Assets creep higher. Provision expense is up from comparable periods with some reserve build being realized. Overall changes to criticized loan ratios represent benign early delinquency trends.
The general tone is defensive as banks plan to remain cautious in 1H24 until the economic and interest rate environments show clearer direction. Most outlooks are adopting the soft landing scenario and a range of 3 to 6 quarter point rate cuts through the year. The path of the forward curve would have a mixed impact to results as most banks remain asset sensitive. Rate cuts in the soft landing scenario are viewed as beneficial to capital markets activity and boosting overall loan demand.
One issue that strikes me is the perspective on monetary policy and rate cuts. There seems to be a gap in perspective between investors and bank senior executives. I include some call comments from the past week that I believe illustrate my point (my emphasis).
SNV CFO Jamie Gregory stated, “assuming a stable rate environment, we continue to expect the first quarter net interest margin to be relatively stable, followed by expansion in the second half of the year. Longer-term, the benefits of fixed asset repricing remain a significant tailwind to the margin. Our sensitivity profile remains relatively neutral to the front end of the curve, and we remain slightly asset sensitive to longer-term rates. However, during an easing cycle, the margin will exhibit short-term pressure due to the timing lag between loan and deposit repricing.”
Gregory added, “as we think about volatility in revenue in 2024, the risks and opportunities are actually fairly similar to each other. It comes from things like deposit mix, economic activity and the Fed interest rate policy. So you know that our guidance is basically a flat rate scenario. So we have no Fed easing in the guidance. We have the long end staying stable at 4%.
But within that, using those assumptions, we would say that the biggest risks and opportunities come from deposit mix, economic growth, loan growth, business growth, we would say those kind of present both risks and opportunities to 2024.”
Also from FITB CFO Bryan Preston,“returning to a normal curve where we would have, I’d say, a 3% front end and maybe 100 to 200 basis points of spread between the front end and the 10-year rate is a very ideal environment for us because, one, we are going to get the benefit of deposit repricing lower, and at the same time, still being able to pick up a lot of benefit associated with that fixed rate asset repricing. So being able to achieve a 3.20% plus NIM in that kind of scenario, a year or two forward would be something that would be easily — that should be very easily achievable.” With the 3-month/10-year spread deeply inverted after 1st inverting 16 months ago, a normal positively sloped yield curve is still well out in the future. A bull steepener in a soft landing as Preston lays out would be incredibly beneficial to the banks, but this is very much outside their control along with revenue drivers such as economic growth. Banks will spend 1H focused on deposit mix, business growth and expense control until the environment is more accommodating.