Economic Outlook: 

The U.S. economy demonstrated resilience in 2023, outperforming growth forecasts with a GDP growth of 2.5%. However, the OCC projects a slowdown in economic growth to 2.4% in 2024 and further to 1.7% in 2025. The labor market remains robust, with the unemployment rate at 3.8% in Q1 2024, but it is expected to rise to 4.1% by year-end. Inflation, measured by the Core PCE Price Index, is anticipated to decrease from 2.9% in Q1 2024 to 2.2% by the end of 2024 and to 2.1% by the end of 2025. 

Banking Performance: 

Despite economic challenges, bank profitability has remained robust. The federal banking system’s return on equity (ROE) increased slightly to 11.7% in 2023, up from 11.6% in 2022. However, community banks, defined as those with assets under $10 billion, experienced declining profitability. 

Net interest income (NII) growth was strong, with the federal banking system seeing a 13.8% increase in 2023. Community banks saw a more modest NII growth of 4.9%. Loan growth for the federal banking system was slow, increasing only by 0.5%, while community banks experienced a nearly 7% increase. Credit card lending grew by over 10% from the previous year. However, the net charge-off rate for the federal banking system increased to 0.60% in 2023, up from 0.30% in 2022, indicating a rise in credit risk. 

Key Risk Themes: 

Credit Risk: The OCC highlights increasing credit risk, particularly in the commercial real estate sector. Office spaces and certain multifamily properties are under stress due to higher interest rates and structural market changes. Loans with interest-only terms set to refinance within the next three years are of particular concern. 

Market Risk: Net interest margins (NIMs) are under pressure due to strong deposit competition, although the pressure may be peaking. Funding costs and NIMs remain critical areas to monitor as interest rate uncertainties and depositor behavior evolve. 

Operational Risk: The operational risk remains elevated, driven by evolving cyber threats, increasing digitalization, and the adoption of new products and services. Check and wire transfer fraud, along with rising payment fraud incidents, are specific concerns highlighted by the OCC. 

Compliance Risk: Maintaining fair and equitable product delivery amid changing customer preferences is a significant challenge. Banks must adapt their compliance risk management frameworks to address evolving risk profiles effectively. 

Funding and Liquidity: 

Strong deposit competition throughout 2023 exerted pressure on net interest margins. The cumulative deposit beta for the federal banking system reached 51% after seven quarters of monetary tightening. Although wholesale funding usage continued to grow, its pace slowed entering 2024. Investment portfolio depreciation has improved, but unrealized losses remain elevated due to high interest rates. 

Economic Outlook: 

• GDP Growth: 
  • 2023: 2.5% 
  • 2024 Forecast: 2.4% 
  • 2025 Forecast: 1.7% 

• Unemployment Rate: 
  • Q1 2024: 3.8% 
  • End of 2024 Forecast: 4.1% 

• Inflation (Core PCE Price Index): 
  • Q1 2024: 2.9% 
  • End of 2024 Forecast: 2.2% 
  • End of 2025 Forecast: 2.1% 

Commercial Real Estate Vacancy Rates (Q4 2023): 

• Office: 13.5% 
• Multifamily: 7.6% 
• Industrial: 5.7% 

Home Price Growth: 

• Over 5% in the second half of 2023 

Bank Profitability: 

• Return on Equity (ROE): 
  • Federal banking system: 11.7% in 2023 (up from 11.6% in 2022) 
  • Community banks (assets < $10 billion): Declining profitability in 2023 

Net Interest Income (NII) Growth: 

• Federal banking system: 13.8% increase in 2023 
• Community banks: 4.9% increase in 2023 

Loan Growth: 

• Federal banking system: 0.5% increase in 2023 
• Community banks: Nearly 7% increase in 2023 

Credit Card Lending: 

• Over 10% increase from the previous year 

Net Charge-off Rate: 

• Federal banking system: 0.60% in 2023 (up from 0.30% in 2022) 

Cumulative Deposit Beta: 

• 51% for the federal banking system after seven quarters of monetary tightening 

Looking Ahead: 

The OCC emphasizes the importance of proactive risk management and firmwide resilience efforts. Banks are urged to establish a strong risk culture that identifies potential risks before they materialize into stress events. By maintaining a focus on firmwide resilience and continuous improvement in risk management practices, banks can ensure their financial soundness and ability to serve customers effectively in an evolving economic landscape. 

The Spring 2024 Semiannual Risk Perspective serves as a valuable resource for the industry, examiners, and the public, offering insights into the key issues facing national banks, federal savings associations, and federal branches and agencies.