Regional banks' Q4 results show NII pressure likely to persist in 2024

Regional banks closed out an exceptionally tough year featuring aggressive interest-rate hikes by the Federal Reserve and the subsequent failures of Silicon Valley Bank, Signature Bank (OTCPK:SBNY) and First Republic Bank (OTCPK:FRCB). But, with rate increases and the regional banking crisis now largely in the rearview mirror, what’s in store for the industry in 2024?

In 2023, shares of mid-sized lenders suffered, while the broader stock market prospered. The SPDR S&P Regional Banking ETF (KRE) and the iShares U.S. Regional Banks ETF (IAT) slid 10.1% and 12.3%, respectively, while the S&P 500 jumped 24.7%.

Regional bank stocks did see some relief in late 2023 as investors became more optimistic that the Fed will start cutting rates as early as March. That aligns with the fact that Treasury yields peaked in October, while equities bottomed out, as seen in this chart. In recent weeks, though, some Fed officials have pushed back on the notion that rate reductions will occur as soon as the market expects.

As such, regional banks face uncertainty around net interest income, which measures the spread between what lenders earn on their loans and pay out on their deposits. The key profitability measure fell at a slew of regional banks during Q4, as deposits became more costly, and most also expect NII to slide this year.

Kicking off 2024, it appears that such banks are not yet out of the woods, with KRE down 5.1% and IAT -4.7% YTD (vs. S&P 500’s 0.2% increase) as of Friday afternoon. The continued weakness comes in the wake of underwhelming earnings for Q4 2023, and, in some cases, disappointing 2024 outlooks.

Another common theme during the quarter was that a number of banks paid a one-time charge for a special assessment by the Federal Deposit Insurance Corporation. The regulator is using the assessments to replenish its Deposit Insurance Fund to recoup losses from March’s bank collapses. Also, bearing in mind the lingering macroeconomic uncertainty, quite a few banks set aside more capital to cover potential losses from delinquent and bad debt.

Truist Financial (TFC), M&T Bank (MTB) and Fulton Financial (FULT) are among some of the regional banks that posted underwhelming Q4 results. Likely, more investors had their eyes on 2024 guidance.

KeyCorp (KEY), the Cleveland, Ohio-based lender, guided for a 2%-5% Y/Y decline in NII. Q4 NII (taxable equivalent), meantime, edged up to $928M from $923M in Q3 and dropped from $1.23B in the year-earlier quarter.

“We have a clearly defined net interest income opportunity moving forward as our short-term swaps and treasuries reprice, particularly in the second half of the year,” KeyCorp Chairman and CEO Chris Gorman said during the company’s Q4 earnings conference call.

Elaborating on this “opportunity,” CFO Clark Khayat said: “the benefit increases each quarter as more of the swaps roll off and treasuries mature, culminating in the full amount in the first quarter of 2025. So, this all builds quarter by quarter since the initial set of swaps came off the books in the first quarter of 2023.”

Similarly, M&T Bank (MTB) expects its NII (taxable equivalent) to fall 5.0%-6.5% in 2024 from $7.17B in 2023. The measure slipped to $1.74B in Q4 from $1.79B in Q3 and from $1.84B in Q4 2022.

While lower rates hinder NII, they would be a boon for MTB’s commercial lending and investment banking business, according to finance chief Daryl Bible. “I think their markets will get excited and you are going to have some things take off, and there will be a lot more investment, which will help the lending side,” he said during the company’s Q4 call.

On the other side of the fence, some mid-sized lenders’ guidance actually encouraged investors. Fifth Third Bancorp (FITB), for example, saw its 2024 revenue outlook exceed the average analyst estimate after Q4 2023 earnings surpassed Wall Street expectations.

SA’s Quant system gives Customers Bancorp (CUBI) the highest rating among regional banks, followed by Business First Bancshares (BFST) and United Bankshares (UBSI).