The U.S. banking industry has found greater stability following bank failures in March and April 2023, and S&P Global Ratings expects most banks to perform well and build capital in 2024, according to its 2024 U.S. bank outlook.

Still, potential further declines in deposits, funding cost pressures, unrealized losses, commercial real estate exposures and economic uncertainty remain key risks. Also, regulators last year proposed important changes to capital and resolution requirements, which could finalize in 2024, perhaps with some alterations. Regulator also may propose further updates to supervision and regulation in the wake of the failures.

With the Fed holding rates flat before pivoting to rate cuts sometime in mid-2024, S&P expects banks to experience only modestly declining deposits and a likely leveling off of funding costs in the first half of the year. In addition, S&P expects that profitability will dip but remain in good shape and that banks will build capital. While net interest income may decline in 2024, S&P further expects banks to generate a return on common equity of 10% to 11% in 2024. S&P also predicted that asset quality pressure will increase but remain manageable.

Key risks to these expectations include the economy entering a deeper recession with higher unemployment and asset quality deteriorating significantly, as well as high inflation persisting despite a slowdown in growth, forcing the Fed to maintain higher rates for longer.