U.S. Regional Banks Experience Decline in Profits Due to Increased Deposit Competition

Major U.S. regional banks such as Charles Schwab, Citizens Financial, and US Bancorp report decreased profits as competition for deposits from larger banks impacts lending margins.

Several major U.S. regional banks have reported a decrease in profits, signaling that the income boost from Federal Reserve interest rate hikes is beginning to diminish. Charles Schwab, Citizens Financial, and US Bancorp all cited rising costs of retaining customer deposits and one-off charges as contributing factors to the decline in fourth-quarter net interest income (NII), which is the difference between what banks earn from lending and what they pay on deposits. The Fed's rate hikes last year aimed at curbing inflation had initially boosted many lenders' NII, which is a core business for most regional banks. However, the growing competition for deposits from larger banks has been eating into their profits and, in some cases, dampening loan growth.

The exodus of deposits from smaller institutions, which were perceived as riskier, following the collapse of Silicon Valley Bank and two other regional lenders last year, has benefited big banks. However, potential Fed rate cuts this year are expected to further dent NII, as some banks have cautioned. Charles Schwab reported a 47% decrease in quarterly profit, partly due to a 30% drop in NII caused by higher deposit costs. Citizens Financial saw a 71% decline in profit, with NII down 12%, while US Bancorp's profit fell 14% as NII dropped 4.2%. PNC Financial, another major regional lender, also reported shrinking profits, with NII contracting 8%. Citizens warned that its NII this year could be 6% to 9% below the $6.24 billion it made in 2023.

Analysts expect earnings per share to decrease for 11 U.S. regional banks with assets of $50 billion to $100 billion, primarily due to increased deposit costs. The KBW regional bank index was down 1% at the time of reporting, in line with the broader market, but still up about 10% since the industry crisis in March. Despite the NII declines, some analysts believe the sector remains attractive, with Citi analysts expressing optimism about the regionals over the next 12-18 months.

In addition to the lower profits, regional banks also took significant one-time charges to replenish the Federal Deposit Insurance Corporation's (FDIC) deposit insurance fund, which was impacted by the crisis. Executives at top banks such as JPMorgan, Bank of America, and Citigroup, which reported lower profits on Friday, were generally positive about the economy, noting the resilience of American consumers even as defaults on consumer loans return to pre-pandemic levels. However, uncertainties remain in the market, including whether the economy will avoid a recession and when the Fed will start to cut rates as inflation eases.

Strong U.S. retail sales data showing the economy on solid footing has cast doubt over market expectations of a Fed rate cut in March. Despite the challenges, the industry remains cautiously optimistic about the future.