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Regional banks closed out an exceptionally difficult year with aggressive interest rate hikes by the Federal Reserve and the subsequent bankruptcies of Silicon Valley Bank, Signature Bank (OTCPK:SBNY) and First Republic Bank (OTCPK:FRCB). But, with rate increases and The regional banking crisis is now largely in the rearview mirror, what's in store for the industry in 2024?
In 2023, midsize lender stocks suffered, while the broader stock market prospered. The SPDR S&P Regional Banking ETF (KRE) and the iShares US Regional Banks ETF (IAT) fell 10.1% and 12.3%, respectively, while the S&P 500 jumped 24.7%.
Regional bank stocks saw some relief in late 2023 as investors became more optimistic that the Federal Reserve will begin cutting rates as early as March. This is consistent with the fact that Treasury yields peaked in October while stocks bottomed, as seen in this chart. However, in recent weeks, some Federal Reserve officials have rejected the idea that rate cuts will happen as soon as the market expects.
As such, regional banks face uncertainty around net interest income, which measures the spread between what lenders earn on their loans and what they pay on their deposits. The key measure of profitability fell at a number of regional banks during the fourth quarter as deposits became more expensive, and most also expect the NII to fall this year.
Going into 2024, it looks like these banks are not out of the woods yet, with KRE down 5.1% and IAT -4.7% year to date (versus the S&P 500's 0.2% gain) on Friday the afternoon. The continued weakness follows disappointing results for the fourth quarter of 2023 and, in some cases, a disappointing outlook for 2024.
Another common theme during the quarter was that several banks paid a one-time fee for a special assessment by the Federal Deposit Insurance Corporation. The regulator is using the assessments to replenish its Deposit Guarantee Fund to recover losses from the March banking collapses. Furthermore, given the persistent macroeconomic uncertainty, many banks set aside more capital to cover possible losses arising from bad and bad debts.
Truist Financial (TFC), M&T Bank (MTB) and Fulton Financial (FULT) are among some of the regional banks that posted disappointing results in the fourth quarter. More investors probably had their eyes on the 2024 forecast.
KeyCorp (KEY), the Cleveland, Ohio-based lender, forecast a 2%-5% year-over-year decline in NII. Meanwhile, fourth-quarter NII (taxable equivalent) rose to $928 million from $923 million in the third quarter and fell from $1.23 billion in the prior-year quarter.
“We have a clearly defined net interest income opportunity going forward as our short-term swaps and Treasuries appreciate, particularly in the second half of the year,” KeyCorp Chairman and CEO Chris Gorman said during the company's fourth quarter earnings conference call.
Elaborating on this “opportunity,” CFO Clark Khayat said, “the profit increases each quarter as more swaps clear and Treasuries mature, culminating with the full amount in the first quarter of 2025. So, everything “This is accruing quarter-over-quarter since the initial set of swaps came off the books in the first quarter of 2023.”
Similarly, M&T Bank (MTB) expects its NII (taxable equivalent) to fall between 5.0% and 6.5% in 2024 from $7.17 billion in 2023. The measure fell to $1.74 billion in the fourth quarter from $1.79 billion in the third quarter and from $1.84 billion in the fourth quarter of 2022.
While lower rates hamper NII, they would be a boon for MTB's investment banking and commercial lending business, according to finance chief Daryl Bible. “I think your markets will get excited and some things will take off and there will be a lot more investment, which will help the credit side,” he said during the company's fourth-quarter conference call.
On the other side of the fence, guidance from some midsize lenders actually encouraged investors. Fifth Third Bancorp (FITB), for example, saw its 2024 revenue outlook surpass analysts' average estimate after fourth-quarter 2023 earnings beat Wall Street expectations.
SA's Quant system gives Customers Bancorp (CUBI) the highest rating among regional banks, followed by Business First Bancshares (BFST) and United Bankshares (UBSI).
