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U.S. Regional Banks' Top Line to be Under Pressure in Q2
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The U.S. regional banks continue to face the same macroeconomic headwinds that led to the crisis in March and the subsequent collapse of three large regional banks – Signature Bank, Silicon Valley Bank and First Republic Bank. This is also the primary reason for the downward revision of their second-quarter 2023 guidance.
Recently, at an investor conference, several regional banks, including KeyCorp (KEY - Free Report) , Comerica (CMA - Free Report) , Fifth Third Bancorp (FITB - Free Report) , Zions Bancorporation (ZION - Free Report) and Citizens Financial Group, Inc. (CFG - Free Report) , warned of dismal second-quarter top-line performance.
As the Federal Reserve is expected to keep the interest rates high (currently the Fed Fund rates are at a 15-year high of 5-5.25%) and is even likely to increase the rates in the near term, all asset-sensitive banks are expected to witness a decrease in net interest income (NII) and net interest margin (NIM) as funding costs rise. A tough operating backdrop, including waning loan demand, has further aggravated the situation.
KeyCorp CEO Chris Gorman stated that NII is expected to slide 12% sequentially in the current quarter, which is substantially below the 4-5% fall guided during the first-quarter earnings conference call. Notably, previously provided guidance related to loans, deposits and expenses remain unchanged.
Likewise, CMA management underlined expectations of second-quarter NII at the low end of the previously-mentioned range of a sequential decline of 11-13%.
Also, Zions expects NII over the next 12 months to fall, a downgrade from “moderately decreasing,” as previously stated. The company’s second-quarter NIM is expected to be 2.85%, down from 3% recorded in the first quarter. CFG noted that the decline in NII for the current quarter will be “a little more” than 3% previously projected.
Further, Fifth Third expects current-quarter adjusted NII to be down 4-5% sequentially. This is below the guidance of a decline of around 1% provided during the first-quarter earnings conference call. Also, FITB anticipates adjusted total revenues to fall 2-3% from the last quarter, a change from prior expectations of no change. Even average loans and leases and average deposits are now anticipated to remain stable during the quarter, lower than the earlier guidance of stable to up 1% for both.
This is just not about the second quarter. Regional banks are expected to keep facing a challenging operating backdrop all through the year as high rates coupled with soft loan demand and weakening asset quality will put pressure on revenues.
Nonetheless, shares of regional banks have rebounded from their lows in March. But they are still trading below 2023 starting levels.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Though investors are gradually turning bullish on the banking industry, it will take a lot of effort to improve financial performance for the share prices to touch the levels reached at the beginning of the year.
At present, KEY, ZION, FITB and CMA carry a Zacks Rank #3 (Hold), while CFG has a Zacks Rank of 5 (Strong Sell).
Image: Bigstock
U.S. Regional Banks' Top Line to be Under Pressure in Q2
The U.S. regional banks continue to face the same macroeconomic headwinds that led to the crisis in March and the subsequent collapse of three large regional banks – Signature Bank, Silicon Valley Bank and First Republic Bank. This is also the primary reason for the downward revision of their second-quarter 2023 guidance.
Recently, at an investor conference, several regional banks, including KeyCorp (KEY - Free Report) , Comerica (CMA - Free Report) , Fifth Third Bancorp (FITB - Free Report) , Zions Bancorporation (ZION - Free Report) and Citizens Financial Group, Inc. (CFG - Free Report) , warned of dismal second-quarter top-line performance.
As the Federal Reserve is expected to keep the interest rates high (currently the Fed Fund rates are at a 15-year high of 5-5.25%) and is even likely to increase the rates in the near term, all asset-sensitive banks are expected to witness a decrease in net interest income (NII) and net interest margin (NIM) as funding costs rise. A tough operating backdrop, including waning loan demand, has further aggravated the situation.
KeyCorp CEO Chris Gorman stated that NII is expected to slide 12% sequentially in the current quarter, which is substantially below the 4-5% fall guided during the first-quarter earnings conference call. Notably, previously provided guidance related to loans, deposits and expenses remain unchanged.
Likewise, CMA management underlined expectations of second-quarter NII at the low end of the previously-mentioned range of a sequential decline of 11-13%.
Also, Zions expects NII over the next 12 months to fall, a downgrade from “moderately decreasing,” as previously stated. The company’s second-quarter NIM is expected to be 2.85%, down from 3% recorded in the first quarter. CFG noted that the decline in NII for the current quarter will be “a little more” than 3% previously projected.
Further, Fifth Third expects current-quarter adjusted NII to be down 4-5% sequentially. This is below the guidance of a decline of around 1% provided during the first-quarter earnings conference call. Also, FITB anticipates adjusted total revenues to fall 2-3% from the last quarter, a change from prior expectations of no change. Even average loans and leases and average deposits are now anticipated to remain stable during the quarter, lower than the earlier guidance of stable to up 1% for both.
This is just not about the second quarter. Regional banks are expected to keep facing a challenging operating backdrop all through the year as high rates coupled with soft loan demand and weakening asset quality will put pressure on revenues.
Nonetheless, shares of regional banks have rebounded from their lows in March. But they are still trading below 2023 starting levels.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Though investors are gradually turning bullish on the banking industry, it will take a lot of effort to improve financial performance for the share prices to touch the levels reached at the beginning of the year.
At present, KEY, ZION, FITB and CMA carry a Zacks Rank #3 (Hold), while CFG has a Zacks Rank of 5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.