US banks warn costly deposits to weaken interest income in 2024

Four U.S. banks warned of lower interest income for this year on Friday, capping a week of dour commentary from the industry that has been under pressure from high deposit costs.

After more than a year of booking strong profits on the back of the high interest they were able to charge on loans, banks are contending with a string of challenges heading into 2024, including weaker loan growth and potentially tougher capital rules.

Rate cuts from the Federal Reserve later this year could ease some pressure on banks to raise deposit costs further. But some of the central bank’s policymakers have cautioned that elevated rates may need to stick around for longer to bring inflation down to its 2 per cent target.

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

On Friday, Regions Financial (RF.N), opens new tab, Fifth Third Bancorp (FITB.O), opens new tab, State Street (STT.N), opens new tab and Comerica (CMA.N), opens new tab joined peers in warning of lower net interest income (NII) in 2024.

Profits at all three banks also fell due to a one-time charge tied to the special assessment fee they have to pay to refill the Federal Deposit Insurance Corp’s deposit insurance fund.

The KBW Regional Banking Index (.KRX), opens new tab has lost 2.5 per cent so far this week.

“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,” said Macrae Sykes, portfolio manager at Gabelli Funds.

“The inverted one today and the rapid rise in cost of deposits has presented challenges.”

Huntington Bancshares (HBAN.O), opens new tab forecast its 2024 NII would rise or fall 2 per cent from 2023 levels, compared with Wall Street expectations for a nearly 1 per cent drop.

The bank said it expects NII to trough in the first quarter, before expanding over the rest of the year. It also forecast average loan growth of 3 per cent to 5 per cent.

Compared with its peers, the bank’s loan book is more evenly split between retail and business customers.

In the fourth quarter, however, its NII fell 10 per cent.