Outlook for U.S. Banks in Q3 and Beyond


According to a recent research note by Fitch Ratings, the slump in U.S. bank performance is expected to continue throughout the year. However, there is some good news – one key metric for banks is not expected to worsen further.

The second-quarter results showed weakened performance for U.S. banks, primarily due to slower economic growth and inflationary pressure. The cost of holding deposits is rising at a faster rate than the interest earned on loans, resulting in a compression in net interest income.

This trend is likely to persist for the remainder of the year, especially for small and mid-sized lenders, albeit at a slower pace. Fitch Ratings predicts that the increase in funding and credit costs will be offset by a modest recovery in fee income and improved operating efficiency.

It is worth noting that not all banks will experience a squeeze in their net interest income. A Deep Dive analysis by Philip van Doorn identified 10 regional banks within the S&P Regional Banking ETF KRE that are expected to see their net interest margins expand by double digits in 2024.

Nevertheless, banks will continue to face rising deposit costs outpacing asset yields. They are also strengthening their loan loss provisions in preparation for a potential recession, while inflation contributes to higher non-interest expenses.

On a positive note, the growth in credit costs is anticipated to stabilize in the second half of the year.

Additionally, banks are grappling with higher capital requirements, as the U.S. Federal Reserve includes banks with assets as low as $100 billion under its Basel III end game regulations, which will be phased in over the coming years.

The outlook for U.S. banks in Q3 and beyond remains challenging, but there are some potential bright spots amid the headwinds they face.

  • Bank asset quality, weaker profits spark Moody’s reviews and downgrades as it weighs potential 2024 recession
  • Deep Dive: 10 regional banks expected to buck a weak industry trend
  • FDIC approves proposed capital requirements for U.S. banks

Mergers and Acquisitions in the Financial Services Sector

In the second quarter of this year, Jonathan Froelich, a partner at KPMG who closely monitors merger and acquisition (M&A) activity in the financial services industry, noted a pickup in deal-making compared to the previous quarter. However, the lingering economic uncertainty continues to discourage companies from pursuing tie-ups, particularly those that face higher capital costs and potential lower interest rates in 2024 if the Federal Reserve takes action to counter an expected recession.

Froelich stated, “Activity is expected to remain weak until at least the end of the year. Our analysis is based on the assumption of higher rates, increasing unemployment, tight credit conditions, and companies’ hesitance to deploy their cash reserves for M&A purposes.”

Quarter-over-quarter, second-quarter M&A activity showed positive growth, with the total deal value increasing by 9.7% from $58 billion to $63.6 billion. Additionally, the number of deals rose by 3.1% from 1,115 to 1,150.

Approximately 51% of the deal volume in the second quarter involved transactions valued at less than $25 million.

Among notable large-scale deals in the banking sector during the second quarter, JPMorgan Chase & Co. acquired First Republic Bank from the FDIC.

In another noteworthy development, TD Bank, a Canadian institution, decided to cancel its merger plans with First Horizon Corp. due to uncertainties surrounding regulatory approval in the United States.

In the first half of this year, total deal value in financial services M&A dropped significantly by 65.4% from $351.2 billion to $121.6 billion compared to the first half of 2022. The number of transactions also decreased by 42.8%, from 3,957 deals to 2,265 deals.

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