By Manya Saini and Jaiveer Shekhawat
(Reuters) - U.S. mid-sized banks' profits would remain under pressure for most of 2024, Wall Street analysts said, as higher deposit costs and muted loan growth drag their earnings.
Regions Financial (NYSE:RF), Huntington Bancshares (NASDAQ:HBAN) and Fifth Third Bancorp (NASDAQ:FITB) joined peers in reporting smaller first-quarter profits on Friday, due to a steep fall in their interest income.
Shares of Regions Financial and Huntington fell 1.7% and 0.6%, respectively, in morning trading, while Fifth Third gained 4% on first-quarter earnings beat.
Net interest margin, a key measure of banking profitability that takes into account earnings from interest on loans and payments on deposits, also contracted across regional lenders for the second straight quarter.
"2024 could be troublesome for small to medium-sized banks in the U.S.," said Dan Coatsworth, investment analyst at AJ Bell, citing fierce competition for deposits between lenders, the state of the economy and weakening loan growth.
"Larger banks have an advantage... as they are perceived to be safer and often provide a broader range of services."
Most mid-sized U.S. banks are expecting a decline in net interest income (NII) this year, as elevated interest rates have stymied loan activity while efforts to retain customers from chasing better returns elsewhere have pushed up deposit costs.
"I think we've got another quarter of down in net interest income to get through before we see some recovery in the second half and this higher-for-longer is kind of a double edged sword for banks in terms of interest rates," said Stephen Biggar, analyst at Argus Research.
"We need to see a downward trajectory in rates to see improvement in loan growth."
On Friday, Regions Financial, Fifth Third Bancorp and Huntington Bancshares kept their outlook for 2024 interest income decline unchanged.
Rival U.S. Bancorp cut its forecast for full-year interest income, while KeyCorp (NYSE:KEY) and Comerica (NYSE:CMA) maintained their outlooks, when they reported lower first-quarter profits earlier this week.
"The broader higher-for-longer rate environment will continue to challenge net interest income for regional banks, with some institutions facing declines due to higher funding costs or changes in deposit mix and pricing," said Theresa Paiz-Fredel, senior director, Fitch Ratings.
Hotter-than-expected inflation has raised fears of borrowing costs staying higher for longer, which has pushed borrowers on the sidelines and discouraged them from taking out long-term debt such as home mortgages.
"Loan growth remains very weak," analysts at Piper Sandler said in a note earlier this week. The brokerage added that total industry loans grew just 2.2% in the second week of April.
Last week, strong economic data led to analysts pushing back rate-cut expectations to the back half of the year, further clouding the outlook for a meaningful recovery in the mortgage market.
Several banking executives have said they were actively working to lower expenses to counter interest income headwinds.
The pressure on profits has also been a drag on industry stocks. The KBW Regional Banking Index, which tracks a basket of major U.S. regional lenders, has fallen 14.2% this year, underperforming the benchmark S&P 500's 5% gain. (This story has been refiled to remove an incorrect photo)