2024 won't be easy, but it may be easier than 2023, bankers say

After a turbulent year, bankers are showing cautious optimism about 2024, though uncertainty still looms large, according to  a new survey of industry executives.

While deposit competition is still causing worry, bank leaders are confident in their own institutions' credit quality, and their views about future economic conditions are getting brighter, per the survey by IntraFi, which helps banks manage their liquidity.

Some 69% of the bank executives surveyed said they think economic conditions will be the same or better 12 months from now, up from 49% of respondents the previous quarter. 

The survey, conducted in the first two weeks of January, drew responses from 501 bank executives across the country, most of which have under $10 billion of assets.

"There is a noticeable shift looking ahead in the banking sector that seems somewhat more positive," said Paul Weinstein, senior policy advisor at IntraFi. "[Banks] are more optimistic about loan demand, more optimistic about funding costs, more optimistic about the economic outlook. Having said that … there's still a lot of concern for bankers."

One hot-button area is deposit competition. More than 80% of the executives surveyed said deposit competition has increased in the past 12 months, and 44% of them said it's risen significantly. Following the Federal Reserve's rapid interest rate hikes and last spring's banking crisis, banks have had to rapidly increase how much they pay customers to retain their deposits. About one-third of bank leaders said deposit competition is a top concern at their institution.

Still, after the doozy of 2023, the outlook for the upcoming year is less gloomy. Though 56% of the survey respondents said they expect deposit competition to rise in the next 12 months, that figure was down from 77% from the previous quarter. 

Earlier this month, analysts at S&P Global Ratings forecast that banks' funding costs will likely level off in the first half of 2024. "With the Fed holding rates flat before pivoting to rate cuts sometime in mid-2024," the S&P analysts wrote, "we expect banks to see deposits decline only modestly."

Weinstein said that he thinks the days of zero rates are over, so banks will be paying more to fund their loans than they did in previous years. Additionally, it's not just a competition among banks, he said, since there are a number of other ways for consumers to earn a return on their money.

"Even if we have lower rates, the playing field has changed fundamentally," Weinstein said. "The era of easy money — we're not really expecting that to return. So even if rates get marginally better, we still think deposit competition is going to be significant."

Meanwhile, few bank leaders are stressed about their institutions' credit quality. Only 8% of respondents listed credit quality as the biggest source of anxiety at their bank over the next 12 months.

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But the survey revealed a disconnect between bankers' views about their own institutions and their perceptions of the banking industry as a whole. Some 34% of the respondents said credit quality is their biggest concern regarding the industry as a whole.

Though credit trends have been "normalizing" as charge-offs rise from pandemic-era lows, the data isn't signaling major deterioration yet.

Weinstein theorized that bankers are expressing more confidence about the credit quality at their own institutions because they don't have as much information about what's happening at other banks.

"I think they're saying, 'I'm looking at my balance sheet and I feel good about it, but I'm not as confident about the balance sheets at other banks,'" Weinstein said.