Regional Banks Face ‘Challenging’ Outlook as Deposits Dwindle

Regional banks are set to report earnings this week, and the news may not be good.

As Bloomberg News noted in a report Monday, some of these smaller lenders have already warned that revenues could be down, but recent earnings reports from larger banks have spotlighted the pressures facing their smaller competitors.

These banks have been fighting higher interest rates that have driven them to pay more on customer funds as the value of their bonds diminish, and further interest rate hikes and the threat of more regulation won’t make things easier.

“As we go through earnings season, the attention is going to shift back from deposit levels to deposit costs, and the attention is going to shift back to net interest income,” Morgan Stanley analyst Manan Gosalia told Bloomberg. “These things are heading the wrong way.”

Among the banks mentioned in the report is Ohio’s KeyCorp, which last month warned that net interest income would decline by 12% this quarter and not the 4% to 5% it had earlier projected.

Zions Bancorp., based in Salt Lake City, Utah, also cautioned that its net interest margin will decline this quarter.

“From a fundamental perspective, the outlook is challenging,” Goldman Sachs analysts wrote in a note quoted by Bloomberg. “Deposits are shrinking, deposit costs continue to rise more than expected, mix shift out of non-interest bearing is likely to continue and asset re-pricing benefits are not enough to offset the pressure.”

The news comes as banks are already under increased pressure to offer innovations to keep their customers, as recent PYMNTS research has shown.

The percentage of consumers who would switch or consider switching financial institutions (FIs) if their institution did not provide innovative financial products has climbed by nearly half since 2018, when just 19% of account holders said they would do so. As of last year, that figure had jumped to 29%.

“The increase in the proportion of FI account holders willing to switch to another FI to find more innovative products and services indicates the value consumers place upon innovation,” said the report, “Credit Union Innovation: The Race to Meet Consumer Demand,” which was done in collaboration with PSCU.

Overall, 72% of FI account holders said that they see innovation as important, as of 2022, with 47% reporting that they value innovation, even though it is the deciding factor that would make them switch FIs.