Reading the Regional Tea Leaves

As regional bank earnings rolled in these past several days, dueling narratives emerged. In terms of share prices and deposits, the banks were on relatively stable ground. But profits were down sharply from the previous year, and a cloud of uncertainty looms over the prospects for 2024. 

In an effort to keep depositors from fleeing to higher-yielding alternatives, banks were forced to increase payouts on deposits, and net-interest income was hit hard. 

Regionals also saw their bottom lines impacted from one-time fees to replenish the deposit insurance fund at the FDIC after it was depleted by bank failures last March. 

Banks warn that interest rate cuts, whenever they may come, might not be an instant savior, either, since lenders will be forced to charge less interest on loans while still fending off deposit competition. (Read our recent article on deposit betas here.)

And then there’s commercial real estate, a topic that dominated 2023, and shows no signs of letting up. Analysts say CRE exposure, especially office space, is one of their major concerns related to regional banks. Trillions of dollars in CRE loans are set to mature in the next few years—with rates much higher than the last time a similar wave came through.  

Still, some are optimistic about the prospects for regional banks in 2024. 

It's clear that we are getting closer to the trough in net interest income, which should happen by the middle of the year,” Goldman Sachs banking analyst Ryan Nash said. 

Another positive sign came last week, when some regionals experienced strong bond sales, a potential sign that investors are regaining confidence in mid-sized banks. 

“There is very strong demand for credit right now for the regional banks,” Natalie Trevithick, head of investment-grade credit strategy at asset manager Payden & Rygel, said. “It definitely reflects some consensus that we survived the crisis.”