Falling bond yields provided hope for financially constrained U.S. banks in the fourth quarter, but not soon enough to fend off a substantial hit to profits, as the industry's earnings report season kicks off Friday.

FactSet projects the U.S. banking industry will report a 21% decline in fourth-quarter profits from the same period in 2022, reflecting higher costs to attract deposits and deteriorating credit quality of their outstanding loans.

Credit card delinquencies and charge-offs for bad loans likely will continue rising, FactSet predicted, particularly for customers with lower credit quality. Meanwhile, investment banking revenue should remain weak amid reduced mergers, acquisitions and initial public offerings.

Those challenges portend somber quarterly conference calls with banks' investors, said Sean Ryan, vice president and director for FactSet's banking and specialty finance sector.

"We continue to anticipate more actions on expense control, in the form of both formal programs and layoffs," Ryan said, noting larger banks face increasing pressure to cut costs.

Deposit Rates Lag Falling Bond Yields

The Federal Reserve maintained its benchmark lending rate at 5.25%-5.50% in the fourth quarter, but rising investor optimism that it will cut rates sooner rather than later this year pushed bond yields down. The benchmark 10-year U.S. Treasury yield, which financial institutions use to establish borrowing and deposit rates, fell about 70 basis points (bps) in the fourth quarter to 3.88%.

However, the quarter immediately followed a third quart♔er in which the 10-year yield surged 76 bps before topping 5% in early October for tꦍhe first time in 16 years.

Deposit rates don't immediately reflect changes in bond yields. As a result, they remained an earnings hurdle during the quarter—particularly as banks raised deposit rates to recoup deposits lost during last spring's 澳洲幸运5开奖号码历史查询:industry turmoil that led to the failure of three key U.S. regional banks.

In turn, 澳洲幸运5开奖号码历史查询:net interest margins—a key dr🍎iver of banks' profitability—rem❀ained a challenge in the fourth quarter even as bond yields fell.

"While it theoretically means an end is in sight for increasing financing costs, the lags in deposit pricing suggest they will generally trend upward well into 2024, continuing to pressure net interest margins," Ryan said.

Wedbush Securities noted U.S. bank deposits have fallen 6% since peaking in April 2022, trimming banks' ability to finance loan growth. The unrealized balance sheet losses that spurred depositors' defections, meanwhile, remain problematic, though they likely narrowed in the fourth quarter after surging to $700 billion in the third quarter.

A Look Ahead to Friday's Results

Bank of America (BAC), the second-largest U.S. bank and one of four U.S. banking giants schedule꧋d to report quarterly earnings Friday, may exemplify the industry's fourth-quarter earnings hurdles.

The bank's earnings likely fell to 56 cents per diluted share, excluding one-time items, according to the consensus estimate of analysts surveyed by Visible Alpha. That's down 34% from the same period last year. The firm's net interest margin likely decreased to an estimated 2.04%, compared to 2.22% in the same period last year.

Meanwhile, Bank of America's investment banking income likely rose 5% to $1.1 billion, but that remains less than half the level of two years ago. At the same time, analysts anticipate the firm's provision for credit losses increased to about $1.4 billion, up 27% from a year ago.

Rivals Citicorp (C) and Wells Fargo (WFC), also scheduled to report earnings Friday, 𓂃may fare worse on key profit and credit metri🍬cs.

Citigroup said that its fourth-quarter earnings may suffer on account of some additional charges and provisions—including those due to its exposure to Russia and Argentina as well as its commitments to the Federal Deposit Insurance Corporation. Even before that disclosure, analysts expected Citicorp's profit to drop roughly 62% to 43 cents per share. Net interest margin is estimated to show a slight uptick to 2.4%.

Wells Fargo's earnings are projected to rise 19 cents per share to 86 cents per share, while net interest margin shrinks to 2.93%.

Visib🐷le Alpha♈ projects credit loss provisions for both banks will rise 16% and 42%, respectively.

Even industry stalwart JPMorgan Chase (JPM), the largest U.S. bank and whose earnings Friday are expected to contract roughly 4% to $3.40 per share, likely will see a 7% increase in its credit loss provision. Higher interest rat🃏es are likely to boost its net interest margin to 2.73%.