Regional banks in the United States will have a more difficult time increasing their profits in 2024 because they will have to pay depositors more than their larger counterparts while borrower demand remains muted.
The fact that regional lenders are tied to securities holdings that are losing money on paper rather than generating loans or investing in higher-yielding assets may also limit their earnings as the outlook for interest rates becomes more uncertain, according to analysts.
“It’s going to be harder,” Goldman Sachs banking expert Richard Ramsden stated. “They will have to pay more for deposits,” and “challenges” will face the expansion of loans.
According to economists, regional banks will find it harder to turn a profit as they compete with larger, mid-sized banks that are seen as safer and provide a wider range of services. This is especially true for banks with assets of $100 billion or less.
Unrealized Losses For American Banks
Nearly $684 billion in securities that were held to maturity and available for sale were recorded in the third quarter, as reported by the Federal Deposit Insurance Corp. As the Fed lowers rates this year, these losses will decrease.
In recent months, S&P and Moody’s Investors Service downgraded the credit ratings and updated the outlooks for a number of U.S. banks, indicating that funding risks and lower earnings will probably put the industry’s credit strength to the test.
In August, S&P lowered the credit ratings of Comerica Bank (CMA.N) and UMB Financial Corp (UMBF.O), citing increased rates and deposit outflows. It also downgraded the ratings of Valley National Bancorp (VLY.O), Associated Banc-Corp (ASB.N), and KeyCorp (KEY.N), all citing limited earnings.
Regarding the downgrade, UMB stated, “The pressure that regional banks presumably faced as presented by industry observers did not materialize.” “Liquidity, regulatory capital levels, loan portfolio asset quality, and funding sources remain strong across the sector, particularly at UMB.”