US regional bank stocks fall on mixed results, Discover sinks on regulatory review
Reuters
Published Jul 20, 2023 08:16AM ET
Updated Jul 20, 2023 04:35PM ET
By Manya Saini, Nupur Anand and Tatiana Bautzer
(Reuters) -U.S. regional bank stocks fell on Thursday after quarterly earnings showed it was getting more costly for lenders to retain deposits.
Shares of Discover Financial Services (NYSE:DFS) tanked 16% after it disclosed a regulatory review.
Discover incorrectly classified some credit card accounts from around mid-2007, while the Federal Deposit Insurance Corporation (FDIC) is also probing a separate compliance issues, the lender said on Wednesday. It has also paused share buybacks.
The stability of regional lenders' deposits has been under scrutiny after the collapse of Silicon Valley Bank in March caused panicked customers to move their cash to big Wall Street players and money market funds. That has forced some banks to offer consumers higher deposit rates.
Two major mid-sized banks, KeyCorp (NYSE:KEY) and Truist, missed quarterly profit estimates, while Fifth Third beat Wall Street expectations on Thursday. The KBW Regional Banking Index was down 0.5% near close of trading.
Earnings for regional and mid-sized lenders are being squeezed as they pay customers more to retain their deposits.
"The fact that results were not going to be very good had already been factored in," including compressed margins and lower income from interest payments, said Timothy Coffey, an analyst at Janney Montgomery Scott. "But the positive is that we are not seeing any glaring credit issues."
KeyCorp shares recovered from early losses with shares moving 4.1% higher. The bank's profit plunged 50% and it forecast a decline in net interest income (NII).
The bank said it expects NII to decline 4%-6% in the current quarter compared with the previous three months, and loans to fall between 1% and 3% over the same period.
The dour forecast for loans comes in the backdrop of the U.S. Federal Reserve's monetary policy tightening that has raised borrowing costs significantly over the last 12 months.
Regional bank earnings in recent days have reassured analysts that the industry crisis sparked by bank collapses in March has subsided.
"I haven't really seen anything that would dramatically make me alter our assessment" of the turmoil's economic impact, said Goldman Sachs (NYSE:GS) chief economist Jan Hatzius. "We do think it's a drag... but certainly not a recessionary development."
Truist Financial (NYSE:TFC) shares declined 7% after the lender missed estimates for second-quarter profit.
Average deposits at Truist fell 2% sequentially as customers continue to chase higher yielding alternatives for better returns. They fell 5.7% in the second quarter compared with a year earlier.
Outperforming peers, Fifth Third Bancorp (NASDAQ:FITB)'s shares rose 2.6% as the bank's quarterly profit topped expectations, even as it trimmed its growth forecast for full-year NII.
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The bank, on a post-earnings conference, said it expects the high competition for deposits to remain for the rest of the year.
Zions Bancorporation (NASDAQ:ZION) surged 10% after the regional lender reported a sequential rise of about 7% in total deposits during the second quarter late on Wednesday.
Analysts have warned that banks would need to raise the interest they offer clients on their account balances, bringing deposit costs in focus for the remainder of the year.
"Higher cost of deposits would also lead to lower NII growth at a time when loan growth is muted and margins are also likely to stay compressed due to it," said Christopher Wolfe, head of North American banks at Fitch Ratings.
Other U.S regional banks said on Wednesday their deposits mostly stabilized and NII rose in the second quarter.
Analysts are also closely watching the commercial real estate (CRE) loans that have come under pressure with the U.S. commercial property market facing severe challenges since the pandemic.
The regional banks carry the greatest exposure to the troubled sector and some banks have seen uptick in delinquencies. "However, at this stage it is more like caution flags are up but alarm bells are not ringing yet as these things take a while to pan out," said Wolfe.
Written By: Reuters
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