Although increased loan loss provisions and deposit retention costs pinched margins, a number of U.S. regional banks exceeded analysts’ estimates for third-quarter profit on Wednesday. This was due to higher interest rates allowing the banks to charge higher interest rates for loans.
Loan Losses
A number of regional banks saw their shares decline, including US Bancorp, M&T Bank, and Zions Bancorporation (ZION.O).
Profits at US Bancorp (USB.N) and M&T Bank Corp (MTB.N) increased due to stronger net interest income (NII), which is the difference between what banks make from lending and pay out on deposits. This allowed both lenders to surpass Wall Street analysts’ projections even though they increased their reserves for probable loan losses.
While credit loss provisions increased 42% to $515 million, US Bancorp’s NII increased by nearly 11% to $4.2 billion, offsetting a smaller-than-expected 16% decline in earnings.
The Federal Reserve’s aggressive interest rate hikes in an effort to combat inflation have increased lending profits for many banks.
But as borrowers look for higher yielding options, increasing rates have also made lenders pay more to keep deposits. Lenders are also putting more money aside to insure against nonperforming loans as a result of uncertainty about the economic future.
Banks Are Collapsing
Source: ABC News
Investor attention continues to be focused on regional banks. Early in the year, Silicon Valley Bank and two other institutions were overtaken by deposit runs, which caused a collapse in bank shares.
Due in large part to increased credit loss provisions and deposit charges, Citizens Financial Group (CFG.N) and First Horizon Corp (FHN.N) both reported a decrease in their third quarter profit.
The cost of deposits for citizens increased by 34 basis points from the previous quarter, keeping total deposits at $178 billion unchanged. Deposits at First Horizon increased by 8% to $66.5 billion, including a 71 basis point increase in deposit charges.
According to Zions Bancorporation, its deposit charges increased from 0.10% to 1.92% of its total deposits in the previous year. Dropping 1% to $75.4 billion, total deposits.
Zions Bancorporation saw a nearly 3% decline in stock, Citizen Financial saw a 5.6% loss, and First Horizon saw a nearly 2% gain.
“The trick is going to be retaining those customers even if the Fed continues to raise rates,” Marinac stated.
