Several U.S. regional banks beat analysts third-quarter profit expectations on Wednesday as higher interest rates allowed them to charge more for loans, although rising loan loss provisions and deposit retention costs crimped margins.
Shares of several regional banks fell, including M&T Bank and US Bancorp.
Stronger net interest income (NII), the difference between what banks earn from lending and pay out on deposits, boosted profits at US Bancorp (USB.N) and M&T Bank Corp (MTB.N), allowing both lenders to beat Wall Street analyst estimates despite increasing provisions for potential loan losses.
A small-than-expected 16% drop in US Bancorp's profit was cushioned by a nearly 11% growth in its NII to $4.2 billion, Credit loss provisions, however, jumped 42% to $515 million.
Aggressive Federal Reserve interest rate hikes to fight inflation have allowed many banks to make more on lending.
But higher rates have also forced lenders to pay more to retain deposits as customers hunt for higher yielding products. Uncertainty over the economic outlook is also causing lenders to set aside more cash to cushion loans that may go bad.
Regional banks remain a focus of investor scrutiny. Early this year, deposit runs toppled Silicon Valley Bank and two other lenders, sparking a rout in bank shares.
"Most of these banks are seeing increases to their charge-offs and they also seeing slightly higher credit problems that will continue to fester and they have to set aside reserves," said Chris Marinac, director of equity research at Janney Montgomery Scott. However, he added that tightening credit conditions would continue to allow banks to charge more for loans.
"I think the businesses have a lot more staying power," Marinac added.
The KBW regional banking index (.KRX) is down nearly 24% year-to-date, while the S&P regional bank (.SPCOMBNKS) has also dropped 33% in the same period.
Citizens Financial Group (CFG.N) and First Horizon Corp (FHN.N) both reported a decline in their third quarter profit weighed down by rising credit loss provisions and deposit costs.
Citizens' deposit costs climbed 34 basis points over the prior quarter, allowing total deposits to remain flat at $178 billion. At First Horizon, deposit costs rose by 71 basis points, with deposits reaching $66.5 billion, up 8%.
Citizen Financial's stock lost 5.4%, while First Horizon was up nearly 2%.
"The trick is going to be retaining those customers even if the Fed continues to raise rates," Marinac said.
