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Chief executives of Massachusetts-based banks believe that the banking industry will continue to face challenges in 2024, with little possible relief even if the Federal Reserve cuts its benchmark interest rate next year.
CEOs of banks from across Massachusetts surveyed by Banker & Tradesman said they are expecting further declines in net interest margins and continued need for expense management in the coming year as deposit costs will remain elevated, residential lending will stay “muted” and only commercial lending might present some opportunities in select sectors.
If the Fed pushes through all three 2024 rate cuts that its senior leaders predicted at their December meeting, the CEOs said residential lending will only get a slight boost at best as more people would qualify for mortgage loans, and the more than 60,000 people who bought homes in Massachusetts when mortgage rates were between 6 percent and 8 percent would have the opportunity to refinance.
But the growth in mortgages will be muted as the many people with 3 percent to 4 percent rates on their mortgages – as many as 91.8 percent of Americans, according to Redfin economists – are not willing to refinance unless mortgage rates drop to lows seen during the pandemic.
And credit risks in the urban office sector will remain high as the remote work setups persist, vacancies rise and an office building sell-off remains likely, the CEOs said.
Here’s how five banking leaders are approaching next year’s challenges.
Robert Paulhus
President and CEO, Clinton Savings Bank
What are your predictions for deposits, residential lending and commercial lending in 2024?
For 2024, we have budgeted less than 1 percent in deposit growth, given the current challenge in growing deposits throughout the industry. We are hopeful that our new branch in Shrewsbury, which opened in March, will help us get there and then some.
For residential lending, we have budgeted a 2.4 percent growth (as compared to 8.7 percent actual growth through November), which should be attainable as mortgage rates start to come down.
We have budgeted a 5.3 percent growth for commercial lending, which should also be attainable as rates come down and make more commercial real estate transactions financially viable.
What are banks and credit unions preparing for?
We are concerned that there may be some cracks in the commercial real estate sector, especially large office buildings in urban settings. Fortunately, we do not have any of those in our portfolio. Emerging technology remains on everyone’s radar, especially AI, and we will continue to leverage technology to make it easier than ever for customers to do business with Clinton Savings Bank. Phishing scams and fraud are more prevalent than ever so we have increased our staffing in the deposit operations department relative to fraud detection.
Don Doyle
President and CEO, Webster Five
What are your predictions for deposits, residential lending and commercial lending in 2024?
Deposit growth will continue to be a challenge in 2024 as it will be difficult to recover the deposits that left the banking system over the past 12 to 15 months. Although the unemployment rate is low, people are still dealing with high prices and using savings to cover daily living expenses.
2023 has been a difficult year for the mortgage lending industry, and I anticipate this trend to continue into 2024. People are unwilling to abandon their mortgages in the 3 percent to 4 percent range which they secured during the pandemic. Thus, there is little inventory available on the market. Even if rates decline next year, they will not decrease enough to encourage homeowners with mortgages to move.
If mortgage rates decline, it’s possible there could be a slight uptick in mortgage lending for two reasons: 1) More individuals would qualify for a mortgage loan, and 2) those individuals who purchased a home over the past 18 months, at a higher rate, may have an opportunity to refinance at a lower rate. It is unlikely these scenarios would have a significant impact on mortgage lending in 2024, resulting in another soft year.
I anticipate that commercial lending will see growth of 5 percent or less. Elevated interest rates have cooled the commercial real estate market, especially the office market. Additionally, the industrial [real estate] space, which was a very hot sector for many years, appears to be overbuilt. Although slowing, multifamily housing continues to see further development and the need for bank lending.
The commercial and industrial sector should also see slow growth as many businesses have had hiring challenges, thus limiting their growth capabilities. While the Fed anticipates a soft landing, several businesses have elected to delay or reduce projects as concerns for an economic slowdown during 2024 remain.
What are some of the trends that will be prevalent in 2024?
Three trends: a) The continued increase in the digital-first approach, thus continued investment in technology; b) declining margins and c) expense control. Webster Five’s longevity is testament to our ability to weather economic storms. We have been through this before, and we will get through it again. We are stable and secure and equipped to service our customers’ needs through economic upturns and downturns.
Edward Manzi Jr.
Chairman and CEO, Fidelity Bank
What are your predictions for deposits, residential lending and commercial lending in 2024?
From the COVID-19 stimulus efforts, there is still somewhere between $1 and $2 trillion of deposits in the [national] banking system above the normal operating amounts. This will continue to leave the banking system and put pressure on deposit levels across the industry.
We are starting to see some modest thawing [in residential lending] with the moderation of interest rates. But unless we see rates drop down into the 4 percent range, I do not expect a boom.
Given the ongoing economic uncertainty, credit spreads [in commercial lending] will stay elevated. Rates are down from their recent peak but still elevated when compared to the past decade. Commercial loan growth should be moderate and credit quality may deteriorate slightly.
What are some of the trends that will be prevalent in 2024?
The long-term community bank industry consolidation trends will continue as like-minded leaders combine to better deliver on missions. If the recent rate drop holds, we may even see a spike because the purchase accounting will be more favorable.
Matthew Burke
Chairman and CEO, Cape Cod 5
What are your predictions for deposits, residential lending and commercial lending in 2024?
Deposits will continue to be in high demand and this will benefit customers as banks will continue to have to pay attention to the rates they are paying.
Given the amount of folks with ultra-low mortgage rates from the prior cycle and limited new housing supply, expect residential lending to remain muted.
Banks will likely be competitive for [commercial and industrial business] lending while CRE will continue to vary by sector given the well-documented challenges in some of this space.
What are banks and credit unions preparing for in 2024?
Cautiously optimistic for “soft landing” and yet have to be prepared that this may not materialize given the various pressures on consumers and businesses as well as both the domestic political environment and the serious geo-political issues currently on-going.
Robert Fraser
President and CEO, MountainOne
What are your predictions for deposits, residential lending and commercial lending in 2024?
I think we will see the deposit outflow level off and reach an equilibrium. Over time, we’ve seen a move to more CDs than money market accounts, and we think that will stabilize. We’re also seeing the possibility of the Fed funds [rate] dropping via rate cuts, which may stem the tide of outflows and bring in new deposits, as Treasuries and money markets become less competitive than products we offer.
We’re not expecting much of a recovery [in residential lending]. There will be some improvements, and those institutions with good technology for the application process will do better. Even with the expectation of rate declines, it is awfully hard for people to give up a 2.5 percent or 3 percent mortgage.
Based on all reports, asset quality has remained strong for most banks, and so I think we’ll see a pick-up in commercial lending activity. For those banks with exposure to office space they will have more of a challenge, but I do see some modest growth in our commercial loan portfolio going into 2024.
What are banks and credit unions preparing for in 2024?
I think we’re going to see continued consolidation within the industry. The need to attract talent and to invest in technology will require a larger institution to absorb all those costs. I think we will continue to deal with regulatory activism and its impact, as well as the modernization of the Community Reinvestment Act. I believe there is a continued progression toward what we consider normalcy in the economy as supply chains recover, the job market becomes less tight and liquidity improves.
