Analysis: US regional bank profits to be squeezed by pressure to pay for deposits
08/01/2024 15:59
By Saeed Azhar
NEW YORK, Jan 8 (Reuters) - U.S. regional banks have a
tougher road to growing profits in 2024 as they face pressure to
pay more to depositors versus larger peers while demand from
borrowers stays subdued.
With the outlook for interest rates more uncertain, regional
lenders' earnings will also be restrained because they are tied
into securities holdings that are losing money on paper instead
of making loans or investing in higher-yielding assets, said
analysts.
"It's going to be harder," said Richard Ramsden, a banking
analyst at Goldman Sachs. "They are going to have to pay more
for deposits," and loan growth will also be "challenged."
For regional banks, especially those with $100 billion or
less in assets, it will become increasingly difficult to make
money as they compete with large and mid-sized institutions,
which are perceived as safer and offer a broader range of
services, analysts said.
Goldman Sachs predicts net interest income at six of
those lenders will drop by mid-single digit percentages this
year.
Traders of futures contracts that settle to the Fed's
policy rate are pricing in a March start to rate cuts and an
end-of-2024 policy rate about 1.4 percentage points below the
current level.
Still, Fitch Ratings says it expects rates to stay elevated
and put pressure on smaller lenders to pay more to keep deposits
relative to larger peers.
"This will remain a challenge and a drag" on lenders'
interest income and margins, said Christopher Wolfe, head of
North American banks ratings at Fitch. "Banks can retain
deposits, it's just that they will have to pay up to keep them."
For instance, the second-largest U.S. lender, Bank of
America BAC.N , pays an average 0.34% to consumer depositors,
while Utah-based Zions Bancorp ZION.O pays about 2.10% for
deposits and interest-bearing liabilities.
At 11 regional banks with assets between $50 billion and
$100 billion - including New York Community Bancorp, Zions
Bancorporation and Comerica - analysts expect lower earnings per
share this year versus 2023, according to estimates from LSEG.
Of those, four will have lower net interest income (NII),
while others will see small gains, LSEG data shows.
The collapse of three regional lenders including Silicon
Valley Bank last year prompted an exodus of deposits from
smaller institutions to larger banks.
Customers opened about two million net new checking accounts
at JPMorgan last year. Bank of America added 500,000 accounts
and has 19 consecutive quarters of growth in new accounts, CEO
Brian Moynihan told investors last month.
Meanwhile, banking giants should benefit more from net
interest income if the Fed cuts rates as pressure to pay higher
deposit rates eases.
Fourth-quarter U.S. bank earnings kick off on Jan 12.
CREDIT DOWNGRADES
After Silicon Valley Bank took losses on its securities
portfolio in March, the company collapsed and sparked the
biggest industry crisis since 2008.
U.S. banks' unrealized losses on available–for–sale and
held–to–maturity securities totalled nearly $684 billion in the
third quarter, according to the Federal Deposit Insurance Corp.
These losses will narrow as the Fed cuts rates this year.
S&P and Moody's Investors Service cut credit ratings and
revised outlooks for a slew of U.S. banks in recent months,
warning that funding risks and weaker profits will likely test
the sector's credit strength.
S&P downgraded credit ratings of UMB Financial Corp UMBF.O
and Comerica Bank CMA.N in August, citing deposit outflows and
higher rates. It also cut KeyCorp's KEY.N rating, citing
constrained profits, alongside Associated Banc-Corp ASB.N and
Valley National Bancorp VLY.O .
"The pressure that regional banks presumably faced as
presented by industry observers did not materialize," UMB said
about the downgrade. "Liquidity, regulatory capital levels, loan
portfolio asset quality, and funding sources remain strong
across the sector, particularly at UMB."
Associated Bank and Valley National Bank did not immediately
respond to requests for comments.
"Despite the headwinds posed by inflation, elevated interest
rates and global events, regional banks remain well-positioned
to continue supporting their customers and communities," said
Warren Hrung, head of research at American Bankers Association.
Comerica predicts its net interest income (NII) will
weaken in the fourth quarter versus the third, but could trough
in 2025 before improving, James Herzog, Comerica's finance
chief, told investors in December. The company declined to
comment on the S&P move.
KeyCorp expects improving net interest margin (NIM) and
NII, particularly in the back half of the year, CFO Clark Khayat
said in December.
Zions Bancorp ZION.O projects NII will stabilize as it
re-prices loans to offset higher funding costs. Its NII dropped
12% in the third quarter from a year earlier, it said in its
earnings presentation.
"Smaller banks are having to increase their deposit pricing
faster than larger banks," said Greg Demas, CEO of Nomis
Solutions, which provides loan and deposit pricing software to
banks.
Deposit betas - which track how banks pass Fed interest
rates moves to depositors - stood between 15% and 19% at the
largest U.S. banks, versus a low-60% range at regional and
community banks at the end of the third quarter 2023, Nomis
estimated.
Despite the uncertain outlook, Ohio-based lender
Huntington Bank HBAN.O benefits from higher rates because
about 60% of its loans are based on floating rates, allowing it
to boost borrowing costs on auto loans or mortgages more quickly
than peers.
"When rates go up, the price of our assets goes up,"
Huntington CEO Stephen Steinour told Reuters. He expects income
from interest payments to grow this year because of higher
prices on floating-rate loans.
"We are asset sensitive - not every bank is," he said.
(Reporting by Saeed Azhar; additional reporting by Niket
Nishant; editing by Lananh Nguyen, Megan Davies and Nick
Zieminski)
((Saeed.Azhar@thomsonreuters.com; +1 347 908-6341; Reuters
Messaging: saeed.azhar.reuters.com@reuters.net))