Home

US regional banks: Stable deposits amid profit declines

PUBLISHED

2023-07-24

Content

Many investors entered the second-quarter earnings season expecting the worst for regional banks.

But that didn’t materialise in the results released this week—at least not for the bigger players.

Many banks, including KeyCorp, Western Alliance Bancorp, and Zions Bancorp, posted sharp profit declines. But their deposits were stable or higher compared with the first quarter, a relief after customers yanked their money earlier this year across the industry. Other regional lenders, such as Citizens Financial Group and M&T, also posted higher deposits over the quarter.

For many investors, that was enough to count as great news. Citizens, U.S. Bancorp, and KeyCorp were all up 8.7% or more this week. Zions rose 18%.

The KBW Nasdaq Bank Index added more than 6% this week, and the KBW Nasdaq Regional Banking Index climbed by even more. The upward momentum slowed as more regional-bank results came out toward the end of the week, but both indexes notched their best weekly performance in more than a year.

Investors are feeling good overall, embracing risk-on investments such as meme stocks and bitcoin. This year’s surprising stock market rally gives midsize lenders more cushion to ride out the year’s ups and downs. And quick action from regulators and bankers in March has, so far, helped prevent the failure of several midsize banks from morphing into the full-blown systemic crisis some initially feared.

But the results also pointed to a tough road ahead.

“I think confidence in the system has been restored somewhat,” Bruce Van Saun, chief executive of Rhode Island-based Citizens, told The Wall Street Journal. “I still think we’re in a challenging environment.”

Banks had to shell out more interest to keep depositors around in the second quarter, after another rate hike made investments such as money-market funds more lucrative than bank accounts. The rapid rise in interest expenses has eaten into profits, especially at Main Street banks, which typically don’t have the big fee-based businesses, like wealth management, of their larger counterparts.

Profit fell short of Wall Street estimates at many regional banks in the second quarter—even powerhouses like Truist Financial, Fifth Third Bancorp, and U.S. Bank. Giant counterparts JPMorgan Chase and Wells Fargo, meanwhile, beat expectations and posted blockbuster profit increases in the process.

The declines were especially sharp at some regional banks whose deposits have proved more flighty, with year-over-year profit sliding 17% at Western Alliance and 14% at Zions.

Compared with a year earlier, deposits were down at banks of all sizes. But many midsize and small banks had to rely more heavily on costly sources to fill the holes, such as loans from the Federal Home Loan Bank system or deposits that are brokered through a third party.

A key profitability metric known as net interest margin fell broadly at regional banks in the second quarter. NIM measures the difference between what banks charge on loans and what they pay on deposits.

“That’s been a big question overhanging the banks, the regionals in particular: When does the bleeding in net interest margin stop?” Van Saun said.

A number of regional banks dimmed their profit forecasts for the year. Many have started to hoard more cash rather than using it to make new loans, as they brace for potential new regulations. The economy is also expected to slow, which could cause more Australians to fall behind on loans. Loan demand has already started to slow as household budgets are pinched by higher interest rates and cooler but still-high inflation.

Some regional banks are closely tied to a commercial real-estate market that has started to sputter. Banks have already started to take hits on these loans, especially office properties that have lost value since the pandemic, or they have stashed away money for future losses they expect. Even the vaunted Goldman Sachs took a big second-quarter write-down on its real estate holdings, much of it tied to office properties.

M&T said net charge-offs more than doubled from a year earlier to $127 million, driven by several office buildings in New York City and Washington, D.C., as well as a large healthcare company in New York state. At PNC Financial Services, net charge-offs for commercial real-estate loans jumped to $87 million, from $10 million in the previous quarter and $4 million a year earlier.

PNC Chief Executive Bill Demchak said he thinks commercial real estate, especially office spaces, will have trouble even in the case of a soft landing for the economy.

“I think we’re reserved for whatever happens in that book,” Demchak said on a call with analysts. “But we’ll need those reserves because we do think there’s going to be problems in the office space.”

Author