Big U.S. banks have indicated that they anticipate their net interest income to reach its lowest point in the upcoming quarters. This expectation is contingent on whether the cost of consumer deposits will decrease, according to a research note by bank analyst Ken Usdin.
Attractive Bank Multiples Amid Sector Gains
Despite recent gains within the sector, bank multiples continue to remain attractive. Analyst Ken Usdin from Jefferies highlights this observation.
Top Picks in the Sector
Usdin reaffirms his top picks within the sector:
- Universal banks: JPMorgan Chase & Co.
- Brokers: Goldman Sachs Group Inc. and Morgan Stanley
- Trust banks: Bank of New York Mellon Corp. and State Street Corp.
- Larger regional banks: Fifth Third Bancorp
- Mid-sized banks: Western Alliance Bancorp. and First Horizon Corp.
Consumer-Deposit Repricing Leads Bank Lenders to Assess Net Interest Income
Following the BancAnalysts Association of Boston conference, Usdin reflects on the actions of big lenders who are currently evaluating the status of their net interest income. These lenders are particularly interested in consumer-deposit repricing, which determines the profit banks generate from loans in comparison to their deposit expenses.
Usdin emphasizes that while uncertainty regarding the cost of wholesale capital and the strength of wealth-management units has lessened, the cost of deposits for consumers still poses a significant challenge for banks.
Positive Outlook Due to Lower Interest Rates
The potential for lower interest rates from the U.S. Federal Reserve, coupled with a soft jobs report and a recent drop in Treasury yields, bodes well for banks according to Usdin. He mentions that lower rates are beneficial for capital and credit concerns, offsetting some pressure on net interest income. Despite these favorable factors, Usdin notes that multiples remain attractive but are closely tied to interest rates.
The Latest Outlook in the Banking Industry
The banking sector is facing some interesting challenges as it prepares for the coming quarter. JPMorgan Chase has reported that its net interest income is currently higher than what is projected for the next quarter. Meanwhile, PNC Financial Services Group Inc. expects a repricing of certain consumer deposits.
Deposit Costs and Interest Rates
The future trajectory of deposit costs remains uncertain, as it is unclear how much they will continue to rise after the last rate hike. However, given the expectation of a higher interest rate environment, there is a belief that demand-deposit account balances will gradually decrease and shift towards interest-bearing accounts.
Loan Growth and Risk Management
Banks are experiencing a subdued outlook for loan growth as they focus on building up their risk-weighted asset balances. Additionally, borrowers are adopting a conservative approach, which further contributes to the muted loan growth.
Capital-Markets Fees and Mortgage Activity
Looking ahead, KeyCorp, Regions Financial Corp., and Truist Financial Corp. foresee a rebound in capital-markets fees in 2024. However, mortgage activity is expected to remain subdued.
Office Commercial Real Estate and Credit Concerns
While concerns about office commercial real estate persist, there are no other major credit concerns at the moment. The magnitude of potential losses in the office sector will depend on lease renewals. On the other hand, multifamily properties have generated questions due to higher interest rates, but rising rent levels in most markets have provided support.
Credit-Card Loss Rates
Credit-card loss rates are anticipated to return to "normal" levels in the near future. The labor market will serve as a key indicator for assessing the potential magnitude of consumer losses.
As the banking industry navigates through these challenges, it will be interesting to observe how these factors shape the future of the sector.
Also read: Citigroup pursuing 'Project Bora Bora,' with staff reductions of at least 10% in some areas: report
