The Big Picture: 2023 Financial Institutions Industry Outlook

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A look ahead to the key strategic trends and opportunities expected to drive U.S. Financial Institutions through 2022 and beyond. 

Introduction  

Recovery in the aftermath of the COVID-19 pandemic has brought elevated inflation not seen in 40 years, prompting the Federal Reserve to tighten monetary policy at the quickest pace in three decades. The aggressive actions by the Fed have pushed interest rates considerably higher, boosting earning-asset yields and margins for many financial institutions. However, inflation and the Fed’s response have also sparked recessionary fears, clouded the economic outlook and forced investors and startups to allocate capital with greater discipline to put profitability at the forefront and shift away from growth at all costs.   

The Take  

Many financial institutions welcome the return of higher interest rates, but it brings its share of risks as well. Higher rates and elevated inflation have raised recessionary fears and the prospect of notably higher loan losses for banks, slower growth for life insurers, risks to downside for the property and casualty insurance space and much greater demands from investors supporting financial technology startups.  

Higher rates are generally positive for U.S. banks, which will see their net interest margins recover, but they also threaten credit quality since the shift and elevated inflation promises higher cost for borrowers. 

Inflation threatens to end the U.S. property and casualty industry’s longest streak of calendar-year underwriting profitability in decades in 2022, but we expect it to fuel outsized premium growth through 2023. 

The U.S. life and annuity industry has long waited for rising rates, but the financial markets volatility that has accompanied them will make for an uneven impact on individual carriers. Products that provide principal protection like fixed deferred annuities and fixed indexed annuities offer both a safe haven and, through the early stages of the hardening cycle, crediting rates that may be more attractive than bank CDs. A bear market, meanwhile, could continue to stymie sales of variable annuities. 

The changing environment has possibly had the largest impact on fintechs. Higher rates and recessionary fears have prompted investors to demand discipline from growth-oriented companies, shifting management focus to achieving near-term profitability. Startups across the sector are now intent on cutting costs, which has often meant mass layoffs. But other expenses are also being reined in, including ad spend.