December 07, 2023 (MLN): Fallout over ‘higher for longer’ interest rates will continue to pressure liquidity and margins for U.S. banks in 2024, underpinning the maintenance of a deteriorating sector outlook according to Fitch Ratings in its outlook report.
Despite expectations for lower interest rates in the second half of next year, “U.S. banks will be challenged to quickly follow suit on deposit rates while retaining their deposits against a stronger appetite for higher yields and increased competition from money market funds and other high-yielding alternatives,” said Senior Director Theresa Paiz Fredel.
“Higher rates will naturally cool loan demand and weaken borrower repayment capacity, resulting in higher impairments and credit costs,” he added.
Balance sheet optimization in preparation for potential regulatory changes will also drive bank performance.
While proposed Basel III end-game rules have yet to be finalized, we believe capital requirements will be increased, and as a result, banks will likely maintain lower loan growth in 2024.
Another area worth close watch in 2024 will be credit loss trends. While businesses and consumers have yet to feel the full impact of tighter monetary policy, this resilience is unlikely to carry into next year, which will translate into higher delinquencies and chargeoffs.
“Credit cards and auto loans in particular could potentially deteriorate beyond historical levels in light of our expectations for a much weaker economy in 2024, despite benign forecasted unemployment rates,” said Paiz Fredel.
Revenue and earnings are also likely to take a hit following the CFPB’s proposal to reduce credit card late fees, particularly for monoline credit card issuers, though the extent of the decline will depend on the mitigating actions taken by issuers.
