Stability of US regional banks comes at a price after SVB collapse

Regional banks across the United States have largely halted the massive outflows of deposits that threatened their stability after the collapse of Silicon Valley Bank, but their profit margins are shrinking rapidly and unexpectedly.

Many of the more than a dozen mid-sized U.S. banks that reported earnings this week warned that the turmoil following the SVB collapse had intensified competition for deposits, forcing them to hike rates that they pay to savers and reduce their expected profits.

Providence-based Citizens Financial Group, the nation’s 15th-largest bank by assets, told investors its lending revenue would grow at about half the rate it had forecast as it would have to pay savers more for their deposits.

“We are still going to grow, but not as much as we thought at the start of the year,” Citizens chief executive Bruce van Saun told the Financial Times.

Truist, the regional bank formed in 2019 by the merger of BB&T and SunTrust, also cut its revenue growth target for 2023 “almost entirely due to a weaker net interest income outlook given the costs of higher deposit and funding,” Chief Financial Officer Mike Maguire told analysts. . Cincinnati-based Fifth Third and Salt Lake City-based Zions also lowered their loan earnings outlook for the rest of the year.

All in all, the picture is very different from what bank executives and analysts predicted a year ago. At the time, most expected that rising interest rates from historic lows would translate into windfall profits for lenders, as they could charge more for loans without having to increase deposit rate.

Instead, rapid rate hikes by the Federal Reserve, persistent inflation and, more recently, fears over the collapse of SVB have prompted customers to transfer money between banks and into the funds of the money market looking for better rates.

In a sharp reversal, nearly $69 billion was withdrawn from US money market funds in the week to April 19, but shifting deposits tested the viability of the old-school business model regional lenders, which have long relied on cheap deposits to fund loans to niche customers.

“People are starting to digest the implications of everything. It’s going to be slower growth, lower revenues,” said Chris McGratty, head of U.S. banking research at KBW.

Some banks did better than expected: Western Alliance shares rebounded 20% on Wednesday after the Phoenix-based bank’s CEO said it had seen $3 billion in deposit inflows in recent weeks , partially offsetting releases earlier in the year.

But there will likely be more immediate difficulties for some regional lenders. According to Fed data, customers withdrew nearly $600 billion in deposits from all US banks in the first quarter of this year. The country’s four largest lenders – JPMorgan Chase, Bank of America, Wells Fargo and Citigroup – hold about 45% of all bank deposits in the United States, but account for less than 10% of outflows.

Indeed, some smaller lenders who have reported worse results than their larger rivals. Shares of Eagle Bank, an $11 billion lender based in Bethesda, Maryland, plunged 20% on Thursday after it reported deposits fell $1.3 billion, or 14% in the first quarter . Dallas-based Comerica on Thursday reported a 9% drop in deposits to $64.7 billion.

First Republic and PacWest Bank, two lenders considered most at risk from deposit flight, will not release their results until next week.

Still, the reported results suggest that regional lenders, in general, have been able to conserve cash for their customers by raising the rates they pay depositors.

Deposits at Fifth Third, Huntington and KeyBank, midsize lenders with about $200 billion in assets each, fell less than 3% in the third quarter. But their deposit costs have skyrocketed as customers transferred money from non-interest-bearing accounts to certificates of deposit, which carry higher interest rates and have a set time limit.

“The net interest margin of these banks will fall; it’s just a matter of how quickly it will happen,” said Alexander Yokum, an analyst at CFRA Research, which tracks regional banks.

At KeyBank, for example, the cost of deposits in the first quarter of the year rose to $350 million, up 2,400%, from the $14 million in interest paid to depositors during the same period a year ago. CDs and other term deposits now represent 60% of the bank’s deposits.

Industry experts say the regional banking system has fared better than expected. “My personal view is that the majority of these banks are well equipped to weather” this period, said Ron O’Hanley, CEO of giant depository bank State Street. “Will some banks have challenges? Yes, but for most of them it is an income issue and not a credit issue. »

Additional reporting by Harriet Clarfelt in New York

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