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Earnings, Cont’d: Not Out of the Woods Yet

230427 Earnings Contd Blog

‘For hundreds of smaller banks, the likely solution will be to reduce lending.’

As bank earnings reports continued to roll in this week, the prevailing theme, with some exceptions, has been don’t panic. But do proceed with caution. Here’s a quick look:

Most regional banks reported earnings that met expectations. That was thanks in large part to elevated net interest incomes. But those cushions, analysts are noting, may be short lived. (More on that soon.)

Deposits were way down across the board. While that was expected given the recent liquidity crisis, it’s still striking: The median dip in deposits at eight closely watched regionals was 10.5%.

Net interest margins are likely headed down too. With banks forced to pay more to attract and keep deposits, Morningstar's Tom Lauricella said, earnings are clearly under pressure. Meanwhile, per American Banker, Piper Sandler reported that interest margin pressure was an overriding first-quarter theme, and “has been even worse than we forecast. ... The outlook continues to get rougher.”

Last weekend’s ”Why the Banking Mess Isn't Over” piece in The Wall Street Journal offered a similar take. Mobile banking has made it easier and cheaper for consumers to move their money, the article notes. And banks, seeing depositors flee in favor of higher-earning money market funds, expect to raise deposit interest rates further to compete.

Responding to the current environment could mean some combination of raising capital and conserving assets. “For hundreds of smaller banks, the likely solution will be to reduce lending,” says the WSJ—a move that would also address the need to reserve for loan losses that could spike if an expected recession takes hold.