Written by Manya Saini and Jaiveer Shekhwat
(Reuters) – Wall Street analysts say profits at midsize U.S. banks will remain under pressure through much of 2024, as rising deposit costs and weak lending growth weigh on earnings. Indicated.
Regions Financial, Huntington Bancshares and Fifth Third Bancorp also reported lower first-quarter profits Friday, along with their peers, due to a sharp decline in interest income.
Net interest margins (which take into account interest on loans and income from deposit payments), an important measure of banks' profitability, also shrank for the second consecutive quarter across regional financial institutions.
Most mid-sized U.S. banks will see lower net interest income (NII) this year as rising interest rates hamper lending activity while efforts to deter customers from pursuing better returns elsewhere drive up deposit costs. is expected to decrease.
“I think we have to get through another quarter of a decline in net interest income before we see some recovery in the second half of the year.This prolonged period of interest rate increases is something of a double-edged issue for banks in terms of interest rates. It's a sword,'' said Stephen Biggar, an analyst at Argus Research.
“For loan growth to improve, interest rates need to be on a downward trajectory.”
On Friday, Regions Financial, Fifth Third Bancorp and Huntington Bancshares maintained their forecasts for lower interest income in 2024.
Rivals KeyCorp and Comerica also maintained their expectations for NII declines this year when they reported lower first-quarter profits earlier this week.
Theresa Paizfredel, senior director at Fitch, said: “The prolonged and widespread high interest rate environment continues to challenge net interest income for regional banks. “We are facing a decline due to changes in evaluation.
Borrowers are on the sidelines, refraining from taking out long-term loans such as mortgages, as concerns that higher-than-expected inflation will keep borrowing costs high for an extended period of time.
“Lending growth remains very weak,” Piper Sandler analysts said in a note earlier this week. The brokerage added that total industry loans increased by just 2.2% in the second week of April.
Last week, strong economic data led analysts to push back their expectations for rate cuts to the second half of the year, further clouding the outlook for a significant recovery in the mortgage market.
Bank executives said they were aggressively cutting expenses to counter interest income headwinds.
Pressure on profits is also weighing on industry stocks. The KBW Regional Bank Index, which tracks a basket of major U.S. regional financial institutions, has fallen 14.2% since the beginning of the year, lagging the benchmark S&P 500's 5% rise.
(Reporting by Manya Saini and Jaiveer Singh Shekhwat in Bengaluru; Additional reporting by Arasu Kannagi Basil and Tatyana Bautzer; Editing by Shinjini Ganguly)
