U.S. regional banks are anticipated to face a challenging path to profit growth in 2024, confronted by the necessity to offer higher deposit rates compared to their larger counterparts amid restrained demand from borrowers. The uncertainties surrounding interest rates further constrain regional lenders’ earnings, given their ties to securities holdings that are currently experiencing paper losses. Analysts argue that regional banks, particularly those with assets of $100 billion or less, will find it increasingly difficult to compete with larger institutions, perceived as safer and offering a more extensive range of services.
Richard Ramsden, a banking analyst at Goldman Sachs, suggests that regional banks will encounter difficulties paying more for deposits, and loan growth will be a significant challenge. Goldman Sachs predicts a mid-single-digit percentage drop in net interest income at six regional lenders in 2024. Fitch Ratings expects elevated rates to persist, pressuring smaller lenders to offer higher deposit rates compared to larger peers, thus becoming a drag on their interest income and margins.
Smaller banks may find it challenging to retain deposits, prompting them to offer higher rates to maintain their customer base. For example, Bank of America pays an average of 0.34% to consumer depositors, while Zions Bancorp pays about 2.10% for deposits and interest-bearing liabilities. Analysts estimate lower earnings per share for some regional banks in 2024 compared to 2023, with the collapse of some regional lenders in 2023 leading to a deposit exodus to larger banks.
Despite uncertainties, large banking giants like JPMorgan and Bank of America are expected to benefit more from net interest income if the Federal Reserve cuts rates. As the pressure to pay higher deposit rates eases, these larger institutions are likely to experience improved net interest income.
The collapse of Silicon Valley Bank in 2023, which took losses on its securities portfolio, triggered a crisis in the industry, resulting in downgrades of credit ratings for various U.S. banks. Unrealized losses on available-for-sale and held-to-maturity securities totaled nearly $684 billion in the third quarter of 2023. Credit rating agencies like S&P and Moody’s downgraded ratings and revised outlooks for several U.S. banks, citing funding risks and weaker profits.
While smaller banks are facing headwinds from inflation, elevated interest rates, and global events, industry observers suggest that they remain well-positioned to support their customers and communities. Regional banks like Comerica and KeyCorp expect improvements in net interest margin (NIM) and net interest income (NII) as they navigate the challenges posed by inflation and interest rate fluctuations. Despite the uncertainties, some regional banks, like Huntington Bank, may benefit from higher rates due to their asset sensitivity, enabling them to increase borrowing costs more quickly.
In summary, U.S. regional banks are navigating a complex landscape in 2024, marked by the need to offer higher deposit rates, uncertainties in interest rates, and challenges in retaining deposits amid heightened competition with larger financial institutions. While some banks anticipate improvements in NIM and NII, the industry remains cautious, considering the potential impact of rate cuts and the need to address funding risks and weaker profits.
