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As regional banks close the door on a year fraught with anxiety, stemming from the Federal Reserve’s aggressive interest-rate hikes, a shadow of concern looms over 2024. The distressing chapter featured the untimely demise of Silicon Valley Bank, Signature Bank, and First Republic Bank. However, with the tempestuous times and travails of the regional banking crisis somewhat behind, investors and industry stalwarts ponder: what lies in wait for the sector this year?
In the annals of finance, the closing chapter of 2023 inscribed a tale of woe for mid-sized lenders. While the broader market reveled in prosperity, the SPDR S&P Regional Banking ETF (KRE) and the iShares U.S. Regional Banks ETF (IAT) descended by 10.1% and 12.3%, respectively. In stark contrast, the S&P 500 scaled dizzying heights, leaping by 24.7%.
Despite the gloom, a ray of hope pierced through the storm clouds in late 2023, as investors rallied around the prospect of an imminent reduction in interest rates by the Federal Reserve, potentially commencing in March. This optimism dovetailed with the zenith of Treasury yields in October, coinciding with the nadir of equities, as illustrated in the market’s ebbs and flows. Nevertheless, recent dissenting voices from Federal Reserve officials have cast a pall over the anticipated timeline for interest rate cuts.
Entangled in this swirling uncertainty, regional banks confront a foreboding forecast regarding net interest income (NII), the barometer measuring the spread between earnings on loans and payouts on deposits. During the fourth quarter, a multitude of regional banks witnessed a decline in this pivotal profitability metric, as the cost of deposits escalated. Moreover, the majority anticipates a further erosion of NII in the current year.
The advent of 2024 finds these banks ensnared in continued despondency, with KRE down 5.1% and IAT plummeting by 4.7% year-to-date, in stark contrast to the S&P 500’s meager 0.2% uptick as of last week. This prolonged weakness emanates from lackluster Q4 2023 earnings and, in numerous instances, disheartening 2024 outlooks.
Throughout the quarter, a recurring motif was the imposition of a special assessment charge by the Federal Deposit Insurance Corporation on several banks. The regulator levied these charges to replenish its Deposit Insurance Fund, depleting due to the collapses of banks in March. Simultaneously, against a backdrop of lingering macroeconomic ambiguity, several banks bolstered their reserves to offset prospective losses stemming from delinquent and non-performing debt. Truist Financial, M&T Bank, and Fulton Financial were among the banks that delivered lackluster Q4 results, while investors eagerly scrutinized their 2024 guidance.
KeyCorp, the Cleveland-based lender, steered toward a 2%-5% annualized drop in NII. Notably, Q4 NII (taxable equivalent) inched up to $928 million from $923 million in Q3, yet waned from $1.23 billion in the corresponding quarter a year earlier. Chris Gorman, the Chairman and CEO of KeyCorp, articulated, “We have a clearly defined net interest income opportunity moving forward as our short-term swaps and treasuries reprice, particularly in the second half of the year.” He and CFO Clark Khayat elaborated on this promising prospect, forecasting incremental benefits as the swaps gradually roll off, culminating in a windfall in the first quarter of 2025.
Similarly, M&T Bank anticipates a 5.0%-6.5% decline in NII (taxable equivalent) in 2024 from the $7.17 billion recorded in 2023. This metric ebbed to $1.74 billion in Q4 from $1.79 billion in Q3 and $1.84 billion in Q4 2022. Daryl Bible, the finance chief of M&T Bank, expressed optimism about lower rates, foreseeing an impetus for the bank’s commercial lending and investment banking business, poised for an upsurge in activity and an influx of capital.
Conversely, amidst the prevailing pessimism, some mid-sized lenders’ sanguine projections brought a glimmer of hope to investors. Fifth Third Bancorp, for instance, surpassed Wall Street expectations in Q4 2023, culminating in a 2024 revenue outlook that eclipsed the average analyst estimate. Moreover, SA’s Quant system hailed Customers Bancorp as the premier performer among regional banks, closely trailed by Business First Bancshares and United Bankshares.
