U.S. Community Bank Earnings are Set to Decline Drastically. Credit loss provisions experience first decline since 2021

According to the annual U.S. Community Bank Reports, both U.S. community banks and their larger counterparts are expected to experience a significant decline in earnings in 2023.

The reports highlight that net interest margins will be impacted by liquidity pressures, leading to a double-digit drop in earnings for U.S. banks. In response to the liquidity crunch, banks will allocate reserves for potential loan losses, slow down loan growth, and increase cash holdings on their balance sheets. These measures, coupled with higher funding costs, will further strain margins and overall earnings.

The reports attribute the liquidity challenges to a combination of the Federal Reserve’s tightening measures since March 2022 and customers shifting funds away from banks towards higher-yielding alternatives. Concerns about funding have grown due to recent notable bank failures in U.S. history.

Key Findings from the US Bank Market Report :

  • Projected earnings for U.S. banks in 2023 are expected to decline by 18.3% due to the combination of deposit outflows and significantly higher deposit costs, which will impact net interest margins.
  • Although higher interest rates have resulted in increased yields on loans, they have also created liquidity challenges for banks. In 2023, funding costs are anticipated to rise at a faster rate than the yields from earning assets. As a result, net interest margins are predicted to contract by 10 basis points in 2023 and an additional 7 basis points in 2024.
Fed Interest Rate
  • The report highlights that deposit betas, which represent the percentage of rate changes passed on to customers by banks, will more than double in 2023 compared to the previous year.

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Liquidity Crunch will pressure deposit in the short term community bank

Key Findings from the US Community Bank Market Report

  • In 2023, it is projected that U.S. community bank earnings will experience a significant decline of 22.6%. This decline can be attributed to deposit outflows and notably higher deposit costs, which are exerting pressure on net interest margins. Additionally, credit trends are expected to normalize during this period.
  • The recent surge in interest rates has had a dual impact on community banks. While it has led to higher yields on loans, it has also created challenges regarding bank liquidity. Funding costs are anticipated to rise at a faster pace than earning-asset yields in 2023, resulting in a contraction of 33 basis points in net interest margins.
  • The deposit betas, representing the percentage of rate changes passed on to customers by banks, are predicted to more than triple the level observed in 2022. This significant increase is a response to the liquidity pressures prevailing in the market.
  • To maintain liquidity and navigate the market challenges, community banks will tighten their lending standards. Report expects these banks to continue implementing stricter lender standards, as evidenced by the latest senior loan officer survey conducted by the Federal Reserve in April 2023. This adjustment in lending practices will contribute to higher credit costs for the group as lending activities are scaled back.
Deposit outflow cause community banks

Credit loss provisions at US banks experience first decline since 2021

After two years, provisions for anticipated credit losses at US banks have finally seen a decrease, reaching $19.48 billion during the first quarter.

According to latest data, this figure marks a sequential decline of $831 million compared to the previous quarter’s $20.32 billion. This break in trend comes after seven consecutive quarters of increases that began in the second quarter of 2021. Notably, this decline occurs amidst ongoing interest rate hikes by the Federal Reserve and prevailing concerns about a potential recession impacting the economy.

Credit Provision Trends at US banks