Weekly Review & Outlook: January 8, 2024

Macro economic updates show evidence of a slowly expanding economy driven by Services sector expansion. The focus will turn banking sector and company specific this week as 4Q23 reporting begins Friday.

December employment data surprised to the upside with both ADP (January 4) and the BLS (January 5) surveys showing 164k private sector jobs added in the month. Health care, Government and Hospitality made up the large majority of net new jobs. December PMI data indicated a 14th month of Manufacturing contraction while the Services sector expansion grew modestly through the quarter. The most recent Atlanta Fed GDPNow projection for annualized 4Q23 real growth is 2.5%.

The money center banks kick off 4Q23 earnings releases January 12 with regional and community banks reporting the following weeks. Federal Reserve H.8 data indicates surprising industry loan growth of 1.34% in the quarter led by Consumer and Commercial segments.

Consumer lending was led by Credit Card growth of 5.14% with other Consumer segments such as Auto balances decreasing. C&I balances grew for the first time since the year ago quarter. CRE growth was less than 1% as only C&D balances had growth above 1%.

On the funding side of the ledger, Deposits growth outpaced loans at 1.91% in the quarter across all commercial banks. For Small Banks, deposit growth was 1.4% skewed toward large time deposits. Large time deposits as a percentage of total deposits finished at 12.4% up from 11.9% in September and 7.8% a year ago.

The yield curve inverted further in the quarter as longer maturity rates fell and shorter term rates held steady. Altogether I see the scenario leading to stable funding with slightly larger average earning assets and lower asset yield than is likely in consensus models. I remain hopeful that a majority of banks experienced Net Interest Margin (NIM) expansion in the quarter with a larger percentage guiding to NIM expansion in early 2024.

In terms of the outlook, the negative EPS revision cycle for 2024 estimates based primarily on higher funding costs looks to have peaked in 2Q23 and nearly fully abated in the current time frame. The cumulative effect was median 2024 mid-cap bank EPS being reduced -22.7% since the start of last year. 2024 earnings consensus is now for -6.5% contraction from 2023. This follows median 2023 EPS down almost -6% from 2022 for the group. Optimism now seems to abound for the sector as 2025 consensus EPS indicates median growth of 7.6%.

High single digit growth in 2025 will not be sufficient, in my opinion, to move bank stocks meaningfully higher from current 2024 P/E multiples especially with the elevated credit cycle risk tied to the Fed’s restrictive monetary policy. I think we need to see positive revisions to 2024 estimates following reports to get extension of the recent bank rally.