A recent S&P 2024 outlook report listed the key risks for the U.S. banking sector. Image courtesy of S&P

S&P Global Ratings is expecting that American banks will still perform well this year and build capital as they face a slowed economy and tighter regulatory landscape in 2024.

In its 2024 U.S. bank outlook report, S&P said lenders may experience further declines in deposits, funding cost pressures, unrealized losses, commercial real estate exposures and economic uncertainty.

“With the Fed holding rates flat before pivoting to rate cuts sometime in mid-2024, we expect banks to see deposits decline only modestly and likely funding costs level off in the first half of the year,” S&P said.

The banks may need to continue offering higher yields to maintain deposits at least through the first half, it added.

The report also noted that banks’ profitability will dip but still remain in good shape, and banks will build capital as regulators revised bank capital requirements through the Basel III Endgame.

“While net interest income may decline in 2024, we expect banks to generate a return on common equity of 10 percent to 11 percent and to build capital through earnings retention, particularly as they plan for more stringent capital regulation,” S&P said.

It stated that commercial real estate charge-offs, delinquencies and criticized loans will likely rise due to weakness in the urban office sector which is a “small portion of banks’ CRE portfolios” and mostly concentrated at a subset of regional banks. Diversified loan portfolios and conservative underwriting should help mitigate bank losses, the report said.

S&P published its report the same day commercial brokerage CBRE reported downtown Boston’s overall office vacancy rate climbed again to 15.8 percent and leasing activity dropped 46 percent quarter-over-quarter. Commercial brokerage Colliers had reported that the class B office availability in Boston had hit nearly 28 percent by the end of the third quarter.

Asset quality pressure will increase but remain manageable, the report predicted.

“Most asset quality measures have been normalizing. While we expect further weakening in 2024, we believe banks’ pre-provision earnings generally place them well to absorb the associated credit losses,” S&P said.

Unrealized losses on securities are still significant but will likely decline as the bank’s securities portfolios mature, it added.

S&P estimated that the US gross domestic product growth will be at 1.5 percent this year, compared to the 2.4 percent it forecasted for the whole year of 2023.

The 2024 outlook assessed regional and large regional banks, the biggest “money center” banks, and consumer-focused banks, among others. Regional banks with solid Massachusetts presence covered in the report include Citizens Bank, M&T Bank, Webster Bank, JPMorgan Chase and Bank of America.