While a slump in U.S. bank performance is expected to continue for the balance of the year, at least one key metric for banks isn’t seen as getting any worse, analysts at Fitch Ratings said in a research note on Friday.
Facing slower economic growth and pressure from inflation, U.S. bank performance in the second-quarter mostly weakened, as the cost of holding deposits continues to rise more quickly than the interest they collect on loans.
This compression in net interest income is expected to persist for the rest of the year particularly for small and mid-sized lenders, but at a slower pace.
“Increases in funding and credit costs, should be offset by a modest recovery in fee income and better operating efficiency,” Fitch Ratings said.
Also read: Bank asset quality, weaker profits spark Moody’s reviews and downgrades as it weighs potential 2024 recession
Not all banks are expected to see a squeeze in their net interest income.
MarketWatch Deep Dive columnist Philip van Doorn highlighted 10 regional banks within the S&P Regional Banking ETF
that are expected to widen their net interest margins by double digits in 2024.
See: Deep Dive 10 regional banks expected to buck a weak industry trend
Banks are expected to continue to deal with deposit costs that are rising more quickly than asset yields. They are also beefing up their loan loss provisions to prepare for a potential recession. Inflation is also stoking higher non-interest expenses.
On the plus side, growth in credit costs is expected to stabilize in the second half of the year.
Banks are also facing higher capital requirements as the U.S. Federal Reserve puts banks with assets as low as $100 billion under its umbrella of Basel III end game regulations that will phase in coming years.
See: FDIC approves proposed capital requirements for U.S. banks
Jonathan Froelich, partner at KPMG, who tracks merger and acquisition activity between financial services firms, said the pace of deal-making picked up in the second quarter compared to the previous quarter.
But economic uncertainty continues to discourage tie-ups between companies that face higher capital costs and the prospect of lower interest rates in 2024 if the Fed has to take action to pull the economy out of an expected recession.
“Activity should stay weak at least through year-end, we believe,” Froelich said. “Our case rests on a foundation of higher rates, rising unemployment, tight credit conditions, and companies’ reluctance to deploy cash reserves on M&A.”
Compared to the prior quarter, second-quarter M&A activity turned positive, with total deal value up 9.7% to $63.6 billion from $58 billion in the first quarter. The number of deals increased by 3.1% to 1,150 from 1115 in the first quarter.
About 51% of the deal volume in the second quarter came from transactions under $25 million in value.
Among larger deals among banks in the second quarter, JPMorgan Chase & Co.
acquired First Republic Bank from the FDIC.
In another noteworthy development, Canadian owned TD Bank
scrapped its merger with First Horizon Corp.
due to uncertainty about getting regulatory approval from the U.S.
In the first half of the year, total deal value in financial services M&A moved sharply lower by 65.4% to $121.6 billion, from $351.2 billion in the first half of 2022. The number of transactions dropped by 42.8% to 2,265 deals from 3,957.
Also read: Fed has ‘more work to do’ to get inflation back down, Daly says