In 2024, financial institutions find themselves navigating a complex landscape marked by economic headwinds and myriad challenges. As the financial ecosystem undergoes dynamic shifts, institutions must meticulously chart their course to ensure resilience and sustained growth. Here are eight key considerations for banks and credit unions in this transformative period.

1.    Two trillion dollars of commercial real estate loans will have to be refinanced in the next four to five years. A high percentage of this is interest only, and with higher interest rates and lower property values – heavily in the office space – many of these loans cannot be refinanced. The result will be much more real estate in bank portfolios and more workout deals, both of which will affect bank earnings. This will impact some credit unions as well.

2.    International events (the Mideast, Ukraine) will cause more supply chain disruptions and inflationary pressure. The Mideast is particularly important, as its impact on oil shipments is significant. The result is that the Fed will have difficulty reducing inflation from its current rate of around 4% to its target rate of 2%. While we anticipate the Fed not lowering rates until the second half of the year due to this, item 1 above could force the Fed’s hand.

3.    As we have noted, 2024 will be challenging in the auto finance industry. Auto loans were the fastest-rising category of consumer financing in the last three years, yet actual new vehicle sales were lower than in previous years. This is a sign that vehicle prices have accelerated tremendously. In a softening economy this could spell trouble. Banks and credit unions heavily into indirect financing are particularly at risk.

4.    We probably are already in recession for the bottom quarter of consumer households in the country. Real wages – adjusted for inflation – have been in decline for the last three years, and this is mostly affecting low- to moderate-income households. The result will be more loan losses and increasing provision expense, which will negatively impact earnings.

Figure 1: Percentage of Household Income

Change in Median Real Household Income 

Source: U.S. Census Bureau

5.    Many – but not all – consumer real estate markets are facing pressure. While most markets have not experienced declines in home value yet, there are many stagnant markets and declines in asking prices. A few examples of these types of markets exist in the South (Austin, Texas, and several markets in Florida). This is a result of two items: 

a. Many people who moved to remote places during the COVID-19 pandemic are now being forced to come back into the office and are having to relocate and therefore sell.

b. Many people bought second properties when rates were so low to use them as rental properties and make money (VRBO, etc.). Those properties haven’t panned out as rental properties, and now the owners are trying to sell them, causing market compression.

6.    Margin compression for the industry should feel some reprieve as the Fed has stopped raising rates, but rate reductions may be four to six months away, so the pain will continue to some extent. We saw some of the most significant increases in cost of funds we have ever seen in the last six months of 2023, primarily due to certificate of deposit offerings. The industry held the line on core deposit costs, which was one of the only positive notes, but the fintech space will continue to put pressure on core deposit rates. For example, Wealthfront is offering 5% on a basic savings account.

7.    Many community-based institutions have had their primary real estate lending success in refinancing and, especially recently, have not had nearly as much success in purchase financing. Effectively competing with Rocket is a significant challenge. Refinancing activity is likely to be compressed and depressed for the next four to five years, so unless the purchase market obstacles are overcome, growth in real estate lending will remain difficult. One bright side is that equity lending should be a strong opportunity as homeowners look to leverage the equity they have built with the increase in housing values over the past three to four years.

8.    Finally, regulatory agencies such as the Consumer Financial Protection Bureau will continue to put pressure on earnings. We are all aware of the debit card interchange issue, but the emerging issue is NSF income. While some of the proposed regulations would only directly impact institutions with more than $10 billion in total assets, the market effect will be real for banks and credit unions of all sizes. Even if financial institutions with less than $10 billion in assets are not forced to reduce NSF charges from $25 to $3 from a regulatory perspective, market pressure could force this on smaller institutions.

The bottom line is the industry is likely to face significant pressure in 2024. As financial institutions look to fortify themselves against economic headwinds and an ever-changing financial landscape, it is critical to develop and stay true to a strong strategic direction. Embracing innovation, leveraging technological advancements and fostering agility will be critical to not only weather the challenges but also capitalize on emerging opportunities.