Margin pressures and increased credit costs are anticipated to weigh heavily on U.S. community bank earnings this year, as highlighted in a recent report by S&P Global Market Intelligence. The 2024 U.S. Community Bank Market Report projects a 12% year-over-year decline in earnings for these banks, with expectations for a recovery in 2025 and 2026.
The prolonged period of higher interest rates has squeezed net interest margins for community banks and heightened the focus on deposits, altering their funding dynamics. While Federal Reserve rate cuts later in 2024 may offer some relief in funding costs, substantial reductions will be necessary to significantly lower deposit costs.
“Despite awaiting potential Federal Reserve rate adjustments, most banks are engaged in a fierce competition for deposits amidst prolonged higher rates and regulatory encouragement for liquidity maintenance. This persistent emphasis on deposits will continue to exert additional margin pressures on community banks throughout 2024,” stated Nathan Stovall, Director of Financial Institutions Research at S&P Global Market Intelligence. “Once deposit pricing pressures ease, community banks will confront heightened credit costs as a modest earnings challenge.”
Key findings from the report include:
- Intense competition for deposits is expected to persist amid regulatory pressures and sustained higher interest rates, as banks prioritize deposits over other funding sources.
- Credit quality among community banks is projected to decline in 2024, further weakening in 2025 and 2026 due to increased delinquencies and losses in commercial real estate portfolios. However, this deterioration is viewed more as an earnings challenge than a threat to overall safety and soundness for most institutions.
- Alongside anticipated interest rate declines, community bank earnings are forecasted to rebound robustly in 2025, driven by a recovery in net interest margins, followed by a continued rise in 2026 as provisions for loan losses diminish.
For those interested in obtaining a copy of the 2024 U.S. Community Bank Market Report, please contact [email protected].
S&P Global Market Intelligence provides opinions, quotes, and credit-related analyses that reflect current viewpoints as of their publication date. These are not factual statements or recommendations for investment decisions, and do not assess the suitability of specific securities.
