Banks are on sound financial footing even as the world’s economy wobbles from a series of shocks, according to the 2023 Banking and Capital Markets Outlook by Deloitte released today. Still, while the annual report noted banks’ overall strength, “Russia’s invasion of Ukraine, ongoing supply chain and energy shocks, persistent inflation and tightening monetary policy will be felt unevenly across the industry.”
“Generally, banks are coming into 2023 in a position of relative strength,” the authors said. “Capital buffers are strong, and liquidity is adequate, as of the third quarter of 2022. And while there are signs of consumer and corporate balance sheets depleting, there doesn’t seem to be much cause for alarm yet. In fact, the stress test that the U.S. Federal Reserve conducted in June 2022 of large American and foreign banks domiciled in the United States found these banks to ‘have sufficient capital to absorb more than $600 billion in losses,’ which is higher than the cumulative loan losses during the 2008–2009 financial crisis.”
Retail banking should fare well in 2023, due to higher net interest income from rising rates, but investment banking performance will probably be mixed due to languishing underwriting and M&A advisory activities, according to the report. “In the United States, consumer loan growth has been relatively resilient, but mortgage business revenues are taking a hit as rates and inflation soar. At the start of 2022, mortgage originations declined by 32%, the largest year-over-year plunge in nearly a decade. In addition, subprime auto-loan defaults are expected to climb, further denting banks’ balance sheets. Most major banks are expecting only a modest rise in loan losses, although many are adding to reserves.” Falling fee income also could squeeze U.S. banks in part because of more regulatory scrutiny of fees for services such as overdraft protection, the authors said.