US regional bank shares slide as higher rates dim profit outlook

Stay informed with free updates

Simply sign up to the US banks myFT Digest — delivered directly to your inbox.

Regional US bank shares slid anew after a round of disappointing earnings reports and fresh warnings by a pair of lenders that they will face continued profit pressure at least to the end of 2023.

Alabama-based Regions Financial on Friday reported lacklustre profits, missing analysts’ estimates by more than 15 per cent. Executives told analysts that net interest income, already down this year, will fall another 5 per cent by the end of 2023, as the bank is being forced to pay out more interest in order to keep depositors. The bank also showed a 30 per cent jump in non-performing loans.

“We think we are well positioned for the future,” Regions chief executive John Turner said on a call with analysts. “It’s been an unusual quarter.”

Regions’ stock tumbled as much as 16 per cent in trading on Friday, cutting as much as $2bn the bank’s market capitalisation.

Comerica, based in Dallas, reported that its profits fell by nearly 30 per cent from the same quarter a year ago. Like Regions, Comerica lowered its outlook for interest income for the rest of the year. Comerica’s shares were down just over 6 per cent.

Net interest income, the difference between what banks have to pay depositors and what they can charge borrowers, makes up the bulk of profits for regional lenders.

The nation’s largest banks have generally been able to continue to increase net interest income even as interest rates have risen in large part because of their ability to hold down what they pay depositors, though JPMorgan Chase and others have warned that may soon be coming to an end.

Citizens Financial, US Bancorp and Huntington Bancshares were among the other notable regional lenders reporting declines in profits for the third quarter, falling by 32 per cent, 16 per cent and 8 per cent year on year, respectively.

“Loan growth is tepid across the industry,” Andrew Cecere, chief executive of US Bancorp, told analysts on its earnings call this week. “Demand for loans is quite low.”

Regional banks have had months of relative calm following the industry turmoil precipitated by the sudden collapse of Silicon Valley Bank and a pair of other regional lenders earlier in the year. The last significant US bank to fail was First Republic, which was closed by the Federal Deposit Insurance Corporation in early May.

Shares of regional banks are up 10 per cent since mid-May even after recent pullback, as measured by the KBW Nasdaq Regional Bank index, though they remain down 25 per cent for the year.

Investors and analysts now seem more focused on banks’ profitability than talk of more bank runs or failures. Banks continue to report large unrealised losses on bonds that they bought at the height of the panic, when prices were relatively high and interest rates were relatively low. But those paper losses, which were raising fears over earnings this year, do not appear to be moving the shares of regional lenders this quarter.

Instead, regional bank executives said investors appear to be focused on profit pressures from higher interest rates and concerns that midsized US banks are continuing to fall further behind their much larger rivals.

The dynamics of the larger banks “around their interest income are a little more favourable right now than some of the regionals”, Citizens chief executive Bruce van Saun told the Financial Times after its earnings report earlier this week. “But I would say that these things ebb and flow.”