
Earnings season kicked off with a majority of banks reporting strong third-quarter results. While the common underlying theme in Q3 was increased write-offs, it still rained profits for most of the big banks, mainly on the back of high interest rates. Rate hikes are a double-edged sword for banks, though.
The Federal Reserve's rate policy is hung in the balance, with some economists predicting higher-for-longer interest rates. Banks’ approach to prioritizing noninterest income in 2024 while managing costs will separate the winners from the losers, according to a new report by Deloitte.
2024 Preview: Banking and capital markets
Banks face a variety of challenges going into 2024, according to Val Srinivas, banking and capital markets research leader at the Deloitte Center for Financial Services.

Banks might have to deal with the possibility of interest rates staying higher for longer entering the new year but may drop to between 450 and 500 basis points in the second half of 2024. The impact of ongoing higher rates can permeate banks’ Net Interest Income (NII) as businesses and consumers borrow less, while banks pay a higher rate for their funding. Higher-for-longer can also impact the market value of long-dated assets such as treasuries or fixed-rate mortgages, keeping these asset values from rebounding – a trend seen in recent quarters. Going forward, most banks have boosted their loan loss reserves in anticipation of continued weakness in certain portfolios, including credit cards and commercial real estate, according to the report.
As a consequence of reduced NII, pressure on revenues can ratchet up the focus to reduce costs and maintain earnings, while more stringent regulatory enforcement can add to the cost base. As a result, “the equity narrative will be challenged for banks in 2024. Most bank CEOs will find it challenging to articulate their story/value to investors with the anticipated headwinds,” Srinivas told Tearsheet.
On the bright side, sentiment among corporate and investment banking activity is expected to broadly improve in 2024.
“While the outlook is improved, we don’t expect activity to return to levels seen during the low-rate cycle,” added Srinivas. Capital markets activity is responsive to portfolio repositioning and market volatility – stemming from geopolitical and macroeconomic forces – that may drive capital markets revenues higher in 2024.
2024 Priorities: Cost discipline and profitability top the list
To make up for a potential shortfall in net interest income in 2024, banks can implement different strategies to grow noninterest income and improve profit performance.

Boosting wealth and management businesses by accumulating new assets can help offset shrinking NII. Fee income from payment services is a broader source of growth. Financial institutions with stronger advisory, underwriting, and corporate banking franchises likely have more room to grow their fee income.
Amid adapting to new strategies, many FIs are increasingly turning to automation and advanced technology tools for improved profit margins. This may result in banks further reducing headcount through a number of levers to save compensation costs. However, technology typically requires a substantial upfront investment, including upgraded infrastructure, training the workforce, and alignment with compliance and regulatory requirements.
FIs plan to reapportion capital from other investment budgets or raise new capital to gain productivity from technology investments in areas that can provide long-term value. On the flip side, technology upgrades can put smaller institutions that lack resources or big technology budgets at a disadvantage.
2024 Themes: Two trends that are expected to make it big
Two big trends are picking up steam in 2024.
The first is heightened regulatory expectations regarding capital, liquidity, and operational resilience. Even though the final rules related to Basel III Endgame aren’t finalized yet, banks with $100 billion in assets or more are expected to remodel and reassess the way they manage their capital, with a ripple effect on their lending and trading practices.
The second is the acceleration in the adoption of Artificial Intelligence (AI) — especially Generative AI (Gen AI) — with initial pilots leading to wider, full-scale implementation. To stay ahead of the curve, 43% of organizations are already using recent Gen AI applications, up from 30% the previous quarter, while many others are exploring its potential use cases.

Besides streamlining processes and sparking innovation, Gen AI can contribute to freeing up resources to enable employees to focus more on core business functions including serving customers. Evidence suggests that Gen AI can enhance productivity for front-office employees in investment banks by as much as 27% to 35% by 2026, after adjusting for inflation.
Inversely, the infusion of Gen AI into the banking value chain will likely come with legal, reputational, and other operational risks. Although banks and FIs have been deploying AI applications across a variety of use cases for years, including lending and managing credit risk and fraud, Gen AI in financial services is still in its infancy.
Regulatory bodies are being prompted to establish guidelines enveloping AI given its growing popularity, emerging use cases, and associated risks revolving around ethics, privacy, and security violations. After witnessing the rapid deployment of AI across various sectors in recent months, US President Joe Biden issued an executive order a week ago, which is a preliminary set of rules to strengthen guardrails around making AI more secure and trustworthy, thereby limiting risk. While the effectiveness of the executive order is yet undetermined, it sparks a conversation about the requirement to engage in AI rulemaking.
“Gen AI is being embraced like no other technology in the recent past. Large Language Models (LLMs) could help automate many tasks, not only saving money but also improving productivity. But designing appropriate risk governance and controls is imperative,” said Srinivas.