Explore This Report With These Links 

  1. Banking Industry Profitability Trends 
  2. Banking Industry Balance Sheet Trends 
  3. Bank Strategies For Fourth Quarter And Beyond 

Third Quarter 2024 - Q3 vs Q2 Trends*:

The third quarter of 2024 shows encouraging signs for the banking industry, with net interest margins expanding, Pre-Provision Net Revenue (PPNR) gaining momentum and improving return on assets. As deposit growth outpaced loans and banks maintained strong liquidity positions, financial institutions now have opportunities to optimize their balance sheet positioning heading into the fourth quarter and 2025.

This report outlines key performance trends and strategic recommendations to help your bank capitalize on the improving banking environment. 

Banking Industry Profitability Trends 

  • Net interest income (NII) increased 1.7%, driven by 5 bps of net interest margin (NIM) expansion. Average loan growth was less of a factor in NII growth, increasing a modest 1.0%. Earning asset yields were positively impacted by loan repricings and outpaced a moderating upward trend in cost of funds as banks began lowering rates on deposits late in the quarter.
  • Top line revenue grew 1.5% due principally to NIM expansion while non-interest income was flat.
  • PPNR gained momentum, increasing a solid 3.0%. While revenue growth strengthened, expenses stabilized as technology and other efficiency initiatives offset increasing labor costs. 
  • Loan loss provisioning decreased 0.2%. Loan loss reserves and other credit metrics were.

Banking Industry Balance Sheet Trends 

  • Deposits and securities funded modest loan growth, while banks held excess liquidity in cash and short-term investments. Loan-to-deposit ratios decreased to 82% from 83%. Brokered deposits were favored over other wholesale funding sources.
  • A variety of balance sheet restructuring initiatives were implemented during the quarter, including security portfolio restructurings. In some cases, trading losses were paired with security gains, sale/leasebacks, and BOLI restructurings. Banks were also reshaping wholesale funding portfolios due to the termination of the Bank Term Funding Program (BTFP), changing liquidity needs, and planned repayment of borrowings.
  • Credit remained stable for the quarter. Non-performing assets to total assets increased 3 bps to 0.57%, and net charge-offs to loans decreased 2 bps to 0.22%. Loan loss reserves declined slightly to 1.29% from 1.30%, reflecting strong economic and credit trends. 

Across the nation, banks experienced solid deposit growth, and strong NII and PPNR growth. Growth in deposits outpaced loans, building excess liquidity and increasing opportunities to reposition balance sheets as we look to 2025. NIM expanded as bankers cautiously lowered rates on deposit products while being mindful of client retention. PPNR growth was significant, driven by NII growth and expense control. Return on assets improved to 1.08% from 1.06%, a welcome sign for the banking sector entering the fourth quarter and early planning stages of 2025. Assuming economic data supports continued rate cuts and a normalized upward-sloping yield curve, NIM expansion is expected to continue throughout 2025.

Bank Strategies For Fourth Quarter And Beyond

  • Identify interest rate exposure across the maturity timeline and establish strategies to neutralize risk.
    • Utilize wholesale funding to match fund new fixed rate loan activity and lock in spread. This strategy may also include replacement of the BTFP. Compare FHLB and brokered deposits for best rate execution. 
    • Match non-maturity deposits to variable rate loans.
    • Shift deposit mix from CDs to lower cost non-maturity deposits. 
    • Run multiple scenarios to capture changes in the shape of the yield curve. A bull steepener is most likely in the long run, but it is important to run other scenarios given market uncertainty in 2025. 
    • Evaluate and model the impact of loan prepayments. 
    • Analyze cost and need for additional loan floor protection.
  • Deploy excess liquidity into securities and pay down borrowings.
  • Evaluate security portfolio restructuring opportunities.
    • Interest rates have increased, providing opportunity to lock in higher investment yields. 
    • Review investment ideas in both rising and falling rate scenarios for extension and prepayment/reinvestment risks. 
    • Maintain an active list of bonds to sell for loss/earn back consideration. 
    • Reinvest considering a combination of current income and total return.
  • Consider gain transactions to offset securities portfolio restructuring losses, such as sale/leasebacks and BOLI restructurings. 
  • Set clear strategies for deposit pricing and activate the deposit pricing committee, consisting of stakeholders from treasury management, lending, private wealth and finance. Meet regularly to monitor and adjust pricing strategies based on market competition, NIM goals, and liquidity needs. Be sure to consider timing between changes in SOFR-indexed products and Fed and Prime rates. 
  • Develop deposit-centric incentive programs that include setting deposit goals company-wide and at the individual level for client-facing bankers.
  • Design a Risk-Adjusted Return On Capital (RAROC) approach for pricing new loan activity. RAROC templates should consist of proposed new loan rates and terms, and a funds transfer rate tied to the wholesale funding market. The template should also measure the profitability of the full client relationship, including deposits, deposit spread, other revenue sources, expense allocations, and risk-adjusted allocation of capital. Set a hurdle rate of return with bankers to establish a pricing discipline that meets profitability goals.
  • Execute cash flow hedges to further reduce funding costs. 
  • Elevate the treasury function to build a more consistent discipline around pricing, spread management, and rate sensitivity. 
  • Review liquidity and contingency funding plans. Test unsecured lines, review bond portfolio access, and brokered deposit sources, review volatile deposits, and perform stress tests.

With disruption comes opportunity – While Bank NIM’s and profitability are on the upswing, now is the time to reset strategies and long-term ALM goals for growth, rate sensitivity, NIM, NII, loan spreads, etc. We recommend reverse engineering the P&L to set goals, starting with the desired ROE and backfilling the P&L to achieve bottom-line results. Then, move to the balance sheet to set strategies and goals for each major portfolio – loans, securities, deposits, and wholesale funding needed to support profitability goals. A fully engaged ALCO is an essential element of setting and executing strategies and goals.

*Source: S&P Capital IQ, US Banks <$10B 

Updated 11/19/24