S&P report projects decline in earnings for community banks in 2024

A new report from S&P Global Market Intelligence projects that community bank earnings will decline 12 percent this year before rebounding in 2025 and 2026.

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S&P’s 2024 U.S. Community Bank Market Report said that higher for longer interest rates have put pressure on community banks’ net interest margins and change the funding profile of community banks. Rate cuts by the Federal Reserve will offer modest relief in community banks’ funding costs late in 2024, but more substantial rate cuts will be needed to drive deposits costs notably lower.

“Even as the market waits for the Federal Reserve to pivot to lower rates, most banks remain in a battle for deposits as rates remain higher for longer and regulators encourage banks to maintain liquidity. That continued focus on deposits will lead to additional margin pressure for community banks in 2024,” Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, said. “When deposit pricing pressures eventually ease, community banks will face a new headwind in the form of higher credit costs, serving as a modest headwind to earnings.”

Among the key findings, the report said that fierce deposit competition should persist amid regulatory pressures and higher-for-longer interest rates. This will force banks to place a higher value on deposits than other forms of funding.

Further, it said that community bank credit quality will slip in 2024 and weaken further in 2025 and 2026, led by higher delinquencies and losses in commercial real estate portfolios. However, the deterioration will serve as a hit to earnings rather than a threat to safety and soundness for most institutions.

In addition, along with an expected decline in interest rates, community bank earnings will rebound in 2025 as net interest margins rebound and provisions for loan losses decline.