Friday, 19th April, 2024
Friday, 19th April, 2024
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Reports show meager profit outlook for US banks

Banks were among the poorest-performing sectors on Wall Street Thursday, after earnings from midsized lenders pointed to a weakening profit outlook in the aftermath of a recent industry crisis.

Shares of Comerica, KeyCorp and Zions Bancorporation dropped between two and five percent following first quarter results that revealed a drag from the higher interest payouts needed to retain deposits.

These banks were among US regional lenders punished severely in the wake of Silicon Valley Bank and Signature Bank’s failures last month, which sparked worry of further deposit runs.

The reports were not all bad, with the three banks reporting profitable quarters. Further, despite an uncertain economic backdrop, the banks did not suffer a huge uptick in loan delinquencies.

But in the latest earnings announcements, banks slashed their outlook for 2023 net interest income, which reflects the difference between the revenues banks make on lending minus interest paid out for deposits.

Besides paying out more for deposits, banks are also taking out more borrowings to improve their liquidity position.

– Big banks have advantage –

Executives acknowledged that they expect tougher banking regulations which will limit shareholder payouts, alongside a weakening macroeconomic environment.

“We have been operating under the belief that some of the rosier data that came out in the winter was a little bit of a head fake,” Timothy Spence, chief executive of Fifth Third Bancorp, said on a conference call.

More recent data on the manufacturing and services industry “all are signaling a slowdown,” he added, while persistent inflation will probably keep Federal Reserve interest rates above five percent.

“When that happens that’s very restrictive,” Spence said. “Things are going to break.”

First Republic reported higher quarterly profits and stable deposits. Its shares declined 0.5 percent.

The stock market’s thumbs-down response to the results stood in contrast to relief following earlier reports from JPMorgan Chase, Citigroup and others that have seen stable or increasing deposits from consumers who believe that they are a safer bet right now.

“The large banks have pricing power. They can decide what they want to do with deposits,” said Alexander Yokum, analyst at CFRA Research.

In contrast, midsized banks have “less deposit power and their margins are going to get squeezed,” Yokum added.

Utah-based Zions reported quarterly profits of $198 million, essentially level with the year-ago period.

Zions said in a press release that its “fundamentally solid” results were “overshadowed” by industry turmoil that raised questions about liquidity and capital strength.

The Salt Lake City lender noted that its deposits were higher at the end of the first quarter compared with the end of 2019, before the coronavirus pandemic.

But investors punished the stock in light of a 16 percent drop in deposits from a year ago, to $69.2 billion. There was also an increase in the interest rate for deposits that has pinched its profit outlook.

Buybacks paused

Cleveland-based KeyCorp and Dallas-based Comerica experienced declining deposits too, and lower profits on loans due to higher interest payouts on deposits.

KeyCorp Chief Executive Christopher Gorman expects a tightening of government regulation, meaning “we’ll probably have to carry more capital.”

Comerica also anticipates a more restrictive regulatory approach, which means share buybacks “are on hold until further notice,” said chief financial officer James Herzog. The bank saw deposits drop $3.5 billion to $67.8 billion.

Comerica has seen deposits stabilize after the SVB failure, executives said, adding that in many cases business clients have maintained accounts but reduced holdings to spread funds to more banks.

First Republic Bank, which had been seen as perhaps the most vulnerable of the midsized banks, will report its results on Monday. analyst Patrick O’Hare said the reports in general were in line with expectations, as reflected by the selling pressure in midsized banks in March.

“It’s a sobering reality,” O’Hare said. “They’re being understandably conservative.”


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