Despite navigating through a tumultuous 2023, US regional banks still need to be in the clear as they face ongoing financial challenges. This year has seen significant declines in key financial metrics across the sector, highlighted by drops in shares and profits. For instance, the SPDR S&P Regional Banking exchange-traded fund is down approximately 13%, with individual banks like New York Community Bank, Bank OZK, and Webster Financial seeing significant losses in share value.
Broad losses have particularly hard hit regional banks in their profits during the first quarter. Notable examples include a 22% drop in net income at PNC Financial, 25% at M&T Bank, and 24% at US Bancorp, with Citizens Financial experiencing an even steeper 38% decline. These institutions also reported downturns in their net interest income, a crucial profitability gauge. The economic landscape has been shaped by elevated interest rates, making it costly for banks to pay interest on deposits. Unlike their larger counterparts, regional banks have less buffer to withstand such financial pressures, exacerbated by last year’s bank collapses, leading to a shift in customer deposits to bigger banks.
The backdrop of these challenges is a strong economy with persistent inflation and a robust job market, which has delayed expectations for rate cuts by the Federal Reserve. Fed Chair Jerome Powell indicated that rate cuts will likely be postponed, suggesting a prolonged period of restrictive monetary policy to curb inflation. “Given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” Powell remarked at a Wilson Center event.
In light of these issues, former FDIC Chair Sheila Bair voiced concerns over regional banks’ stability, stressing the need for protective measures against potential bank failures impacting uninsured deposits. “I’m worried about a handful of [regional banks],” Bair stated, emphasizing the gravity of the situation confronting these institutions.
As the regional banking sector grapples with these ongoing pressures, the path forward remains fraught with financial uncertainties and the looming threat of further challenges. These banks’ resilience will be tested as they navigate an economic environment characterized by high-interest rates and delayed monetary relief.
