US regional banks’ stability comes at a price after SVB’s collapse

Regional banks across the US have largely stopped the massive outflow of deposits that threatened their stability after the collapse of Silicon Valley Bank but their profit margins are shrinking unexpectedly quickly.

Many of the more than a dozen midsized US banks that reported earnings this week warned the turmoil following SVB’s collapse had heightened competition for deposits, forcing them to increase the rates they pay to savers and crimping their expected earnings.

Providence-based Citizens Financial Group, the nation’s 15th largest bank by assets, told investors its income from lending would grow at about half the rate it had forecast, because it would have to pay savers more for their deposits.

“We’re still going to have growth but not as much as we thought at the beginning of the year,” Citizens chief executive Bruce van Saun told the Financial Times.

Truist, the regional bank formed in 2019 through the merger of BB&T and SunTrust, also cut its revenue growth target for 2023 “driven almost entirely by a lower net interest income outlook given higher deposit and funding costs”, chief financial officer Mike Maguire told analysts. Cincinnati-based Fifth Third and Salt Lake City-based Zions also lowered their outlook for lending profits for the rest of the year.

All told, the picture is very different from what bank executives and analysts predicted a year ago. At the time, most expected the rise in interest rates from historically low levels would result in bumper profits for lenders because they could charge more for loans without having to increase rates on deposits.

Instead, the Federal Reserve’s rapid rate increases, persistent inflation and most recently fears over SVB’s collapse have prompted customers to move money between banks and into money market funds in search of better rates.

In a sharp reversal, almost $69bn flowed out of US money market funds in the week to April 19, but the shift in deposits has tested the viability of the old school business model of regional lenders, which have long relied on cheap deposits to fund loans to niche customers.

“People are starting to digest what the implication from everything is. It’s going to be slower growth, lower revenues,” said Chris McGratty, head of US bank research at KBW.

Some banks have done better than expected: Western Alliance shares bounced 20 per cent on Wednesday after the Phoenix-based bank’s CEO said it had $3bn of deposit inflows in the past few weeks, partly compensating for outflows earlier in the year.

But there is likely to be more immediate pain ahead for some regional lenders. According to Fed data, customers pulled nearly $600bn in deposits from all US banks in the first quarter of this year. The nation’s four largest lenders — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — hold about 45 per cent of all bank deposits in the US, but represented less than 10 per cent of the outflows.

Indeed, some smaller lenders that have reported fared worse than their larger rivals. Shares of Eagle Bank, an $11bn lender based in Bethesda, Maryland, plunged 20 per cent on Thursday after it reported deposits fell by $1.3bn, or 14 per cent in the first quarter. Dallas-based Comerica on Thursday reported a 9 per cent drop in deposits to $64.7bn.

First Republic and PacWest Bank, two lenders that were seen as the most at risk from deposit flight, will not report their results until next week.

Still, the results reported suggest regional lenders, in general, have mostly been able to hold on to their customers’ cash by raising the rates they pay to depositors.

Deposits at Fifth Third, Huntington and KeyBank, midsized lenders with roughly $200bn in assets each, fell less than 3 per cent in the third quarter. But their deposit costs have shot up as customers moved money out of non-interest bearing accounts and into certificates of deposits, which carry higher interest rates and have a set time limit.

“The net interest margin of these banks will go down; its just a question of how fast that will happen,” said Alexander Yokum, an analyst at CFRA Research, who follows regional banks.

At KeyBank, for instance, the cost of deposits in the first quarter of the year rose to $350mn, up 2,400 per cent, from the $14mn it paid in interest to depositors in the same period a year ago. CDs and other time deposits now make up 60 per cent of the bank’s deposits.

Industry experts say the regional banking system has fared better than feared. “My personal opinion is that the majority of these banks are well equipped to weather” this period, said Ron O’Hanley, CEO of the giant custody bank State Street. “Will some banks have challenges? Yes, but for most of them it’s an earnings challenge not a solvency challenge.”

Additional reporting by Harriet Clarfelt in New York