Higher Credit Expenses, Lower Bank Earnings Likely as Year Ends: WGA Releases US Banking Industry Review & Outlook for Q3 2023
In a recent report released by Whalen Global Advisors (WGA), The IRA Bank Book for Q3 2023 provides a comprehensive review of the latest financial results for the US banking industry, along with an outlook for the rest of the year. The report highlights some key trends and predictions that are expected to impact the industry in the coming months.
According to Christopher Whalen, Chairman of WGA, the US banking industry has experienced two consecutive down quarters for net income as the effects of the Federal Reserve’s massive open market operations in 2020 and 2021 slowly work through the system. This decline in income was predicted by WGA in the first half of 2023. However, there was some relief in Q2 2023 as the change in funding costs was not as severe as anticipated.
One of the key findings in the report is that net interest income and overall banking industry earnings are expected to decline further in the second half of 2023. This is primarily due to unprecedented deposit interest rate repricing and a slowdown in the increase of bank asset returns. Additionally, with the 10-year Treasury note yielding 4.25%, the mark-to-market on the assets of the US banking system resulted in a negative capital position of over $1 trillion as of Q2 2023. Rising interest rates are predicted to worsen the capital deficit in Q3 2023.
While consumer credit losses are expected to remain below expectations throughout 2023, the report warns that losses on commercial and multifamily real estate, as well as related commercial exposures, are likely to be significantly higher than during the previous economic downturn a decade ago. Whalen explains that the first phase of the credit cycle will be dominated by losses in commercial real estate and corporate exposures. By the middle of 2024, above-average credit losses on consumer exposures such as autos and credit cards could occur. The residential mortgage market may be impacted last, depending on whether home prices begin to fall.
As the year comes to a close, Whalen notes that the industry is entering a period of credit normalization, despite weakening earnings. The report predicts that credit losses will evolve and different sectors will be affected at different times.
The IRA Bank Book for Q3 2023 is available for subscribers to the Premium Service of The Institutional Risk Analyst, with standalone copies also available for purchase in their online store. For media inquiries, please contact info@rcwhalen.com.
Whalen Global Advisors (WGA) is a New York-based consulting, risk analytics, and publishing company that focuses on financial institutions and global markets. Through their publication, The Institutional Risk Analyst, they provide commentary on capital markets, industry reports, and company profiles.
Source: Whalen Global Advisors LLC
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