This analysis is by Bloomberg Intelligence Senior Industry Analyst Herman Chan and Bloomberg Intelligence Associate Analyst Sergio Ferreira. It appeared first on the Bloomberg Terminal.
Regional banks’ 4Q earnings results highlight the developing trend of slowing revenue growth and decelerating margin expansion. We heard “uncertainty” repeatedly during the earnings calls, as banks are unsure of the path of interest rates and the economy, and deposit repricing and remixing. Regions Financial may fare better in as more stable funding costs help protect margins.
Guidance less rosy amid questions, deposit repricing
Outlooks for 2023 unveiled during 4Q reporting proved disappointing for a number of banks relative to consensus, pointing to less revenue uplift this year. Factors cited as headwinds include higher deposit costs for Huntington and Zions, yield-curve inversion for First Republic and Citizens, and tighter loan spreads for PNC. U.S. Bancorp and East West bucked the trend with encouraging top-line outlooks. Underpinning the group’s shaky guidance is uncertainty on the trajectory of the economy and also the behavior of deposits amid higher interest rates that haven’t been seen since before the Great Financial Crisis.
Regions noted questions on the full-cycle trajectory of deposit repricing for the industry; Comerica said forecasting deposits is challenging due to uncertainty with respect to the Fed’s rate actions.
Benefits of rate hikes to slow as cycle matures
Robust revenue growth enjoyed by regional banks during the initial stages of rising rates is slowing due to increasing deposit costs, softer lending and defensive hedges. Net interest income (NII) rose 6% at the median in 4Q, from 11% in 3Q, led by Bank OZK and Regions, the two lenders with the greatest margin expansion. For 1Q, NII could drop due to fewer days in the quarter and rising deposit repricing. Citizens expects NII down 2% in 1Q, while PNC forecasts a 1-2% decline. Truist sees revenue falling 2-3%.
With fees mixed and expense growth elevated vs. the pre-pandemic period, banks struggled to deliver sequential positive operating leverage. Fifth Third and Truist benefited from seasonal strength in fees in 4Q, while SVB recorded a pickup in client-investment fees and higher biopharma investment banking.
Deposit repricing catching up, limiting rate benefits
Deposit betas are expected to march higher and are limiting margin benefits from rate hikes. Banks like Truist, M&T and Fifth Third look incrementally more negative, as they note through-the-cycle betas could reach 40% vs. the current 28% median for the group. Deposit betas are accelerating as the fed funds rate reaches its peak during the post-financial crisis period, with regional banks passing on a median 44% of rate hikes to deposit customers in 4Q vs. 24% in 3Q.
Rapidly rising rates are exposing some weakness at the deposit franchises of Signature and SVB, the two regionals that continue to post the highest beta. Others with strong lending prospects, such as First Republic and Western Alliance, have lifted deposit pricing to attract funding for loan growth.
Lending pace solid while deposit outflow persists
Loan growth improved vs. 3Q results, though sustaining the current pace could prove challenging. Truist expects lending to moderate in 2023 due to higher rates, inflation and a slowing economy. Business lending and commercial real estate (CRE) remain bright spots, while banks like Huntington, M&T and Comerica benefited from improved lending to auto dealers, as inventory constraints ease. Bank OZK led the group in 4Q amid robust CRE lending as some competitors pull back in the segment.
Deposits declined in 4Q as banks faced further outflow from larger, rate-sensitive commercial customers. SVB’s deposits fell 6%, as cash burn at startup clients is reducing non-interest-bearing balances. Zions saw outflow from larger business accounts. Banks like First Republic, Citizens and Huntington are relying on CDs to deliver growth.
Main street banking is faring better than wall street
Revenue trends highlight the divergence between the strength at Main Street-oriented regionals and the softness at the largest diversified banks. As regional banks derive a larger majority of revenue from net interest income, high interest rates have spurred a 14% rise in the top line in 2022, led by M&T, a beneficiary of rate sensitivity and a recent acquisition, and higher-growth Signature. Conversely, global US-based banks, with revenue down 1%, have faced tough year-over-year comps as market volatility spurred a retreat in capital markets and M&A deal making.
Similarly, regionals’ lending, with balances up 3% in 4Q, is performing better, as their reliance on commercial loans is favorable in this environment. The largest banks, with loans up only 1%, have more weighting to mixed consumer trends.
Bloomberg
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