Regional Bank Earnings Show Cracks 

Big banks may garner most of the headlines, but industry watchers also look at midsized bank performance to get a sense of overall sector health. Regional bank earnings rolled in recently amid concerns over exposure to commercial real estate, stubborn interest rates, and potential crises in industry deposits. 

Here are some themes that emerged from the reports: 

Pressure From Higher Interest Rates: Across the board, regional banks grappled with the impact of higher interest rates, which have squeezed net interest income and dampened profitability. NII declined for many regional lenders due to elevated deposit costs and muted loan growth. With a prolonged period of higher interest rates likely, analysts anticipate further pressure on profits for most of 2024, with midsized banks particularly vulnerable. 

Credit Quality Concerns and Loan Performance: Regionals are facing mounting concerns regarding credit quality, with notable increases in criticized loans and provisions for credit losses. The deterioration in credit quality is attributed to factors such as high interest rates, post-pandemic disruptions, and vulnerabilities in sectors like commercial real estate (notably office), senior housing, healthcare, and technology. Despite proactive measures and portfolio stress testing, banks remain vigilant about potential loan defaults and repayment issues. 

Adaptation Strategies and Business Diversification: Regional banks are implementing various strategies to adapt to the challenges and diversify their revenue streams. Initiatives include expense control measures, investments in technology and talent, and expansion into noninterest income-generating areas where larger institutions already play, such as investment banking, wealth management, and capital markets. 

For now, though, according to former FDIC Chair Sheila Bair, many remain “overly reliant” on deposits while facing other challenges including “concentrated” CRE exposure. Bair said “the larger picture really is the potential instability of their uninsured deposits even for the healthy ones if we have another bank failure.”