This Week in Earnings – Q4'23

The fourth quarter of 2023 marked the end a turbulent year for the Financials sector. Indeed, interest rates across the yield curve eclipsed their highest levels since before the Great Financial Crisis, deal activity plummeted, competition for bank deposits skyrocketed, five banks failed with a combined $549B in assets (the largest total of assets ever during a single year), and the largest U.S. banks were forced to set aside roughly $9B to cover the FDIC’s tab on this new regional banking crisis. Whew! 

With a wall of worry resurrected earlier in 2023 for the sector, U.S. Bank year-end earnings performances seemed more muted in comparison.

Some of the bright spots this past quarter that helped propel the year-end 2023 rally: 

1. Economic Outlook: Last year was not the economic disaster that some feared on the heels of rapid-fire interest rate hikes from the Fed. To the contrary, many now point to — and are counting on — a relatively resilient U.S. economy to bolster performances in the coming quarters, despite a near universal acknowledgement of the geopolitical pressures abroad;  
2. Consumer Outlook: While credit card balances and delinquencies are on the rise, consumer spending and resiliency continues to surprise to the upside as employment trends remain robust. Commentary suggests executives are cautiously optimistic about the levels of normalization they are seeing as pandemic-era stimulus begins to fade into the abyss; and 
3. Interest Rate Outlook: Hopes sprung eternal late in the fourth quarter that the Fed would finally pivot and lower the Fed Funds rate multiple times during 2024, thereby potentially reversing some financial pressures on banks, including accumulating unrealized losses on bank securities portfolios.   

Key Themes

• Macro: While Risks Still Cloud Commentary, Executives Express Optimism for 2024, Citing Economic Resilience in the U.S. and Increased Confidence for a Soft Landing
• Consumer Health: Spending Remains Better Than Feared as Still-Gainfully Employed Consumers Exhibit “Slow and Gradual” Normalization to Post-Pandemic Levels; Sustained Dynamics Anticipated throughout 2024
• M&A: Despite Regulatory and Political Uncertainty, a “Constructive” Interest Rate Backdrop and Prospects for a Soft Landing Boost M&A Sentiment, with Most Pointing to an Uptick in Activity through Q4
• Loan Growth:  Outlooks Remain Varied; While Some Anticipate Muted Demand Due to Tight Financial Conditions, Others Expect Improvement in 2024 as Rates Ease and the Economy Improves
• Commercial Real Estate (CRE): With Further Charge Offs Expected, Companies Continue to Reduce Exposure and Keep Counterweight Reserves Elevated