As the U.S.’s prominent banking institutions prepare to report their fourth-quarter earnings, a significant surge in bad debts poses a risk to the growing investor confidence in the sector.
Analysts are projecting a decline in bank earnings for the last quarter of 2023, partly influenced by these unpaid loans and the lingering effects of higher interest rates, which have driven up deposit costs.
See Also: US Economy Set For ‘Soft Landing’ As Economists Eye Fed Rate Cuts
Despite the expected earnings fall, investors have been buying up bank shares, with shares rising by 20% since the end of October, as per the KBW Nasdaq Bank index. This surge is underpinned by the Federal Reserve’s indication late last year that it has likely concluded raising interest rates, easing the pressure on interest rates.
“Banks are very interest rate-driven,” said Matt Anderson, a banking industry analyst at commercial property research group Trepp.
“And investors have an optimistic read on the economy in 2024.”
Despite easing interest rate pressures, a potential increase in unpaid loans could continue to hamper bank profits.
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