Given choppy economic conditions, stubborn inflationary headwinds and
Still, analysts also noted that the policymakers have not raised rates in a year, and Federal Reserve Chair Jerome Powell said in June that the central bank's next move mostly will be a
U.S. banks with assets under $10 billion reported that margins on average narrowed from 3.45% in the first quarter of last year to 3.15% a year later, according to S&P Global Market Intelligence data.
"Even as the market waits for the Federal Reserve to pivot to lower rates, most banks remain in a battle for deposits as rates remain higher for longer and regulators encourage banks to maintain liquidity. That continued focus on deposits will lead to additional margin pressure for community banks in 2024," said Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence.
He also said more banks were likely to report loan charge-offs for the second quarter. Adjustable-rate loans that reset to higher interest rates tend to challenge more customers' ability to make loan payments.
Net charge-offs at U.S. banks totaled $20.3 billion in the first quarter, up 63% from a year earlier. Charge-offs as a percentage of average loans were 0.66%, 15 basis points higher than the prior year's first quarter, according to S&P Global.
Due to the impacts of enduring remote work trends on urban office properties and neighboring retail and multifamily properties, commercial real estate credits continue to attract concern. CRE loans' charge-off rate clocked in at 0.27% in the first quarter, 18 basis points higher than the 2023 first quarter.
"Regulators remain focused on banks' CRE exposure levels," and "there seems to be a desire for these concentrations to be worked down," said Stephen Scouten, a Piper Sandler analyst.
Banks of all sizes, from the $3 billion-asset Northeast Bank in Portland, Maine, to the nearly $2 trillion-asset Wells Fargo in San Francisco ramped up reserves in recent quarters to guard against possible CRE losses, including office properties.
However, while uneven, overall operating conditions remain positive. The U.S. economy expanded at an annual rate of 1.3% in the first quarter after advancing 3.4% in the final quarter of 2023, according to the
At the same time, the rate of inflation slowed from a peak above 9% in 2022 in the aftermath of the pandemic and Russia's invasion of Ukraine to lows near 3% this year. The Fed is targeting a 2% rate, but Powell said the Fed's efforts to tame inflation with rate hikes appeared to work without crippling the economy or badly wounding banks' balance sheets.
That assessment aligns with a new American Bankers Association's Economic Advisory Committee outlook,
The outlook "is consistent with an economy that is growing slowly but sustainably," said ABA Chief Economist Sayee Srinivasan. "While it is too soon to declare victory, the Federal Reserve has thus far managed to lower inflation without undermining the labor market — no easy feat. Still, businesses remain cautious about making new capital investments, and consumer financial stress remains a key factor to watch."
D.A. Davidson's bank analysts team said in a report that "credit concerns seem overblown."
They said that, based on bankers' commentary at recent investor conferences and "our catch-up calls with management teams," the second-quarter credit outlook is "fairly stable," though could project a "modest" increase in charge-offs over the second half of the year and then peak early in 2025.
"The biggest risk to our forecast," the Davidson analysts said, "is the Fed waits too long to cut rates and the economy goes into a mild recession, leading to higher credit costs."
