By Manya Saini, Nupur Anand and Tatiana Bautzer
(Reuters) -U.S. regional bank stocks fell on Thursday after quarterly earnings showed it was getting more costly for lenders to retain deposits.
Shares of Discover Financial Services tanked 16% after it disclosed a regulatory review.
Discover incorrectly classified some credit card accounts from around mid-2007, while the Federal Deposit Insurance Corporation (FDIC) is also probing a separate compliance issue, the lender said on Wednesday. It has also paused share buybacks.
The stability of regional lenders’ deposits has been under scrutiny after the collapse of Silicon Valley Bank in March caused panicked customers to move their cash to big Wall Street players and money market funds. That has forced some banks to offer consumers higher deposit rates.
Two major mid-sized banks, KeyCorp and Truist, missed quarterly profit estimates, while Fifth Third beat Wall Street expectations on Thursday. The KBW Regional Banking Index sank 1.5% in afternoon trade.
Earnings for regional and mid-sized lenders are being squeezed as they pay customers more to retain their deposits.
“The fact that results were not going to be very good had already been factored in,” including compressed margins and lower income from interest payments, said Timothy Coffey, an analyst at Janney Montgomery Scott. “But the positive is that we are not seeing any glaring credit issues.”
KeyCorp shares recovered from early losses with shares moving 4.2% higher. The bank’s profit plunged 50% and it forecast a decline in net interest income (NII).
The bank said it expects NII to decline 4%-6% in the current quarter compared with the previous three months, and loans to fall between 1% and 3% over the same period.
The dour forecast for loans comes in the backdrop of the U.S. Federal Reserve’s monetary policy tightening that has raised borrowing costs significantly over the last 12 months.
Regional bank earnings in recent days have reassured analysts that the industry crisis sparked by bank collapses in March has subsided.
“I haven’t really seen anything that would dramatically make me alter our assessment” of the turmoil’s economic impact, said Goldman Sachs chief economist Jan Hatzius. “We do think it’s a drag… but certainly not a recessionary development.”
Truist Financial shares declined 5.8% after the lender missed estimates for second-quarter profit.
Average deposits at Truist declined 2% sequentially as customers continue to chase higher yielding alternatives for better returns. They fell 5.7% in the second quarter compared with a year earlier.
Outperforming peers, Fifth Third Bancorp’s shares rose 2.5% as the bank’s quarterly profit topped expectations, even as it trimmed its growth forecast for full-year NII.
The bank, on a post-earnings conference, said it expects the high competition for deposits to remain for the rest of the year.
Analysts have warned that banks would need to raise the interest they offer clients on their account balances, bringing deposit costs in focus for the remainder of the year.
Zions Bancorporation surged 10% after the regional lender reported a sequential rise of about 7% in total deposits during the second quarter late on Wednesday.
Other U.S regional banks said on Wednesday their deposits mostly stabilized and NII rose in the second quarter.
(Reporting by Manya Saini in Bengaluru; Nupur Anand and Tatiana Bautzer in New York; Additional reporting by Jaiveer Shekhawat, Sri Hari N S and Niket Nishant, Saeed Azhar and Davide Barbuscia in New York; Editing by Shweta Agarwal, Krishna Chandra Eluri and Nick Zieminski)
