Banks are entering the second-quarter earnings season under unrelenting funding cost pressure, with analysts expecting broad declines in revenue and earnings and bracing for even greater downside.

Among the 15 largest publicly traded banks in the US, consensus forecasts have revenues declining sequentially at 12 and EPS declining at nine, according to data from S&P Global Market Intelligence.

Banks have shown resilience after the turmoil that erupted in March, with industrywide deposit levels steadying in the second quarter and cash and other borrowings coming down as banks appear to have partially trimmed precautionary liquidity buildups. But with markets and Federal Reserve policymakers expecting rates to stay higher for longer and the runs early this year underscoring the need to lock in deposits, increases in funding costs look set to continue to hack away at the net interest margin (NIM) widening the industry experienced in 2022.

Analysts at Keefe Bruyette & Woods cut their 2024 EPS estimates by another 4% in a report July 5, bringing the total reduction in their estimates so far this year to 20%. "A more conservative [net interest income] outlook explains the entirety of the negative revisions," they said.

The analysts expect deposit betas, or the move in deposit costs relative to underlying rates, to exceed the 2004 to 2006 rate increasing cycle. If the mix of noninterest-bearing deposits relative to total deposits continues to drop to levels during that period, their 2024 estimates could drop another 20%, they added.

Downhill for net interest margins

Consensus forecasts anticipate sequential NIM compression at 13 of the 15 big banks as growth in funding costs overtakes growth in asset yields, reversing the pattern that prevailed n 2022 during the initial periods of the Fed's hiking campaign.

Seasonally adjusted deposits were flat across domestically chartered commercial banks from March 29 through June 28, according to weekly data from the Fed, and the pivot toward large time deposits moderated. But for institutions looking to pull in new funds, "intra-quarter commentary by many banks suggest that incremental deposits are very expensive" with pricing often 4% to 5% or more, the Keefe Bruyette & Woods analysts said.

A number of analysts also said decelerating growth in loans, which generally produce attractive yields, further dims the outlook for net interest income. Seasonally adjusted loans at domestically chartered commercial banks increased 0.5% from March 29 through June 28.

Further, most of the expensive borrowing that banks added during the upheaval that began in March — on top of already increasing levels of wholesale funding — appears to remain. Other borrowing across domestically chartered commercial banks fell 11.2%, or $165.93 billion, from March 29 through June 28, according to the weekly Fed data, compared with an increase of 50.2%, or $496.99 billion, from Dec. 28, 2022, through March 29.

"It is clear that industry NIMs peaked" in the 2022 fourth quarter, analysts at Piper Sandler wrote in a June 26 report. The big questions are "how far do they decline in the quarters ahead and has the recent decline in bank equity valuations outpaced the actual decline to come in earnings?"

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Credit worries deferred

Analysts do expect sequential increases in loan loss provision expenses at 10 of the 15 big banks, but a median increase in net charge-off rates of just 4 basis points to a still benign median of 33 basis points.

Higher interest rates are due to pressure some borrowers, and credit metrics are deteriorating back up toward pre-pandemic levels, but employment and the economy remain strong.

Wolfe Research analyst Steven Chubak said he pushed out his expectations for higher credit costs to the first half of 2024. "While delinquencies are starting to pick up (particularly on the commercial side), charge-off trends remain benign, and excess consumer savings may not be exhausted until year end," he said in a report July 7.